Take-Two Interactive Software Inc (TTWO) 2013 Q3 法說會逐字稿

Greetings and welcome to Take-Two Interactive's third-quarter fiscal year 2013 earnings call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded.

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

Thank you sir.

You may begin.

Good afternoon.

Welcome and thank you for joining Take-Two's conference call to discuss its results for the third quarter of fiscal year 2013 ended December 31, 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'd like to remind everyone that the statements made during this calls that are not historical facts are considered forward-looking statements under federal securities laws.

These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us.

We have no obligation to update these forward-looking statements.

Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.

These important factors are described in our filings with the SEC, including the Company's annual report on Form 10-K for the fiscal year ended March 31, 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 today.

I'm pleased to report that Take-Two delivered strong revenue growth, profits, and cash flow in the third quarter.

The key drivers of our results were the record-breaking release of NBA 2K13, continued strong sales of Borderlands 2, the successful release of XCOM Enemy Unknown, and robust holiday sales of our catalog and digital delivered offerings.

These results exceeded our outlook and demonstrate that the market for the highest quality interactive entertainment remains strong.

NBA 2K13 has quickly become the most profitable release in the history of 2K sports.

The title achieved record-setting first week sales and has already sold in nearly 4.5 million units worldwide.

Considered by many to be the best release of NBA 2K yet, the title received massive critical acclaim, including more than 37 awards for sports game of the year or best games of 2012.

The success of NBA 2K13 has been enhanced by sales of virtual goods and the introduction of our multi-platform NBA 2K Everywhere experience.

These offerings allow consumers to immerse themselves further into the game's authentic basketball culture, both at home and on the go, and helped enable the franchise to generate its highest ever digitally delivered revenues.

I'd like to thank the teams at Visual Concepts and 2K for their stellar work and ongoing commitment to excellence.

Building on its extraordinary launch in September, Borderlands 2 continues to expand its audience and remains on pace to become the highest selling title in 2K's history.

It has also been the largest contributor to our digitally delivered revenue this year, driven both by strong sales of full-game downloads and high attach rates for the titles out on content, especially the Borderlands 2 season pass.

With nearly 6 million units sold in today, an average Metacritic score of 90 and 73 end-of-year awards worldwide, Borderlands 2 has taken the already successful Borderlands franchise to another level, enabling it to become one of Take-Two's and the industry's most important long-term properties.

Rounding out 2K's plate of successful new titles is XCOM Enemy Unknown.

Developed by the strategy experts at Firaxis Games, XCOM Enemy Unknown reinvents one of the industry's most beloved franchises as a unique action strategy game.

The title is one of the highest rated releases of 2012, achieving a near 90 Metacritic credit score, and winning an impressive 18 game of the year awards worldwide.

As a result, Firaxis Games received the number one spot in Game Informer magazine's prestigious Developer of the Year rankings.

A commercial success, XCOM Enemy Unknown has generated particularly strong digitally delivered sales and is being supported with a popular add-on content campaign.

With Borderlands 2, NBA 2K13 and XCOM Enemy Unknown, 2K has delivered three of the 10 highest rated console releases of 2012 based on average Metacritic score.

I'd like to congratulate 2K on what is shaping up to be the label's best year ever both in terms of financial results and creative achievement.

In addition to new releases, an important driver of our third-quarter results was strong holiday demand for our popular catalog offerings.

Catalog sales continue to be led by Rockstar Games iconic titles, Grand Theft Auto IV and Red Dead Redemption, which are still delighting consumers years after launch.

Our diverse portfolio of catalog titles is a valuable asset that sets Take-Two apart from the competition and provides the Company with a meaningful and relatively stable revenue and profit stream in virtually every period.

Revenue from digitally delivered content more than tripled year-over-year and accounted for 23% of non-GAAP net revenue in the third quarter.

The largest contributors were full-game downloads and add-on content for our console and PC titles.

We also benefited significantly from our growing portfolio of offerings from emerging platforms.

During the third quarter, we released several successful titles for tablets and smartphones representing a range of genres, including Grand Theft Auto Vice City, Borderlands Legends, NBA 2K13, and herd, herd, herd.

We firmly believe that interactive entertainment for mobile platforms, especially tablets, represents an important growth opportunity for our company and we have a number of exciting projects in the pipeline.

We'll have more to say about these in the coming months.

We also continued to make significant progress in our online projects for Asia, highlighted by the commercial launch of NBA 2K online on the Tencent portal in China.

While still in the early stages, or Asian initiatives are already generating cash flow and represent meaningful, high-margin organic growth opportunities without considerable risk.

Karl will have more to share about these efforts shortly.

Take-Two's balance sheet is very strong.

At quarter end, we had nearly $450 million in cash and no borrowing on our $100 million line of credit.

We have ample capital to pursue a variety of investment opportunities and I am pleased to report that our Board of Directors has authorized the Company to returns a portion of that capital to shareholders through the repurchase of our own stock.

This reflects our confidence in the Company's ability to continue delivering growth, profits, and cash flow over time.

As a result of our strong recent results and positive outlook for the remainder of the year highlighted by the upcoming release of BioShock Infinite on March 26, fiscal 2013 is poised to be a profitable year for Take-Two on a non-GAAP basis.

Moreover, with Grand Theft Auto V launching on September 17, fiscal 2014 should be one of our best years ever with substantial revenue and earnings growth.

Looking ahead, we have an extensive pipeline of unannounced titles in development.

We also benefit from what we believe are the strongest assets in our industry, including world-class creative teams, a diverse portfolio of leading intellectual property, ample financial resources, and a sound focus on delivering the highest quality interactive entertainment.

As a result, we are well positioned to capitalize on the full range of opportunities for our business, including the next generation of consoles when they come, emerging mobile and online platforms, and new business models.

This is an extraordinarily exciting time for our industry, and I've never been more optimistic about Take-Two's long-term outlook for success.

I will now turn the call over to Karl.

Thanks Strauss.

I'd like to begin by giving an update on the progress we've made with our online initiatives.

Our strategy has been to focus on a select number of high-impact projects that have significant strategic and financial value to Take-Two while taking a balanced approach to managing risk.

As with our core business, we believe that the strength of our IP and commitment to quality can create compelling commercial opportunities that will differentiate us from other players in the market.

Given their attractive scale and growth characteristics, we have initially focused our efforts on the online gaming market in Asia where we have teamed up with the best-in-class partners whose expertise complements our own.

Through each of these projects, we continue to develop deep knowledge of this growing market segment and are building a clear vision of how we can best leverage this expertise on a global scale.

On October 24, NBA 2K online, our free-to-play online basketball game, launched on the Tencent portal in China.

Codeveloped by Visual Concepts and Tencent, the game is generating significant buzz in the region and user metrics are building momentum.

We continue to tally gameplay based on consumer behavior and are very enthusiastic about the game's prospects to become a meaningful contributor to our profits.

The plan to bring NBA 2K online to additional markets such as Taiwan and the Philippines.

Pro Baseball 2K, our online baseball game, is being developed by Visual Concepts in partnership with Nexon Corporation in Seoul.

The game entered closed beta in November in Korea and is on track for an open beta release this spring.

2K's massively multi-player online game, Civilization Online, continues to make progress.

Currently in development with our Firaxis Games studio and XL Games, which is led by renowned industry veteran Jake Song, Civilization Online is one of the most exciting and ambitious online game development initiatives in the region.

I'll now discuss our announced pipeline of upcoming releases.

On February 26, 2K will deliver a worldwide retail release of the Borderlands 2 add-on content pack which funnels all of the digital content previously released for Borderlands 2 onto a single disc.

The Borderlands 2 add-on content pack is a must-have for Borderlands fans who haven't already downloaded content, adding hours of additional gameplay and exciting new features for the first two add-on campaigns, Captain Scarlett and Her Pirates Booty and Mr. Torgue's Campaign of Carnage.

On March 5, 2K sports will release Major League Baseball 2K13 for the Xbox 360 and PlayStation 3. The title will feature Tampa Bay Rays Cy Young award-winning pitcher David Price as cover athlete and will once again be supported with a perfect game challenge, 2K Sports' groundbreaking $1 million competition.

We are pleased to enter into this new mutually beneficial agreement with various entities associated with Major League Baseball and we expect Major League Baseball 2K13 to contribute to the profitability of 2K Sports.

From Irrational Games, the makers of the highest rated first-person shooter ever, BioShock Infinite is set to release March 26.

Consumer enthusiasm and buzz for this launch continued to grow by the day and we expect the title to be a significant critical and commercial success.

In addition to a series of special additions that are currently available for preorder, fans can purchase BioShock Infinite Mind in Revolt, an e-book prequel to the title which will be available for the Amazon Kindle beginning February 12 and is free for those who preorder the game through Amazon.

Also available free of charge to those who preorder BioShock Infinite is the Industrial Revolution Pack, which includes exclusive access to in-game gear items that boost combat abilities, bonus in-game currency, lock picks and the Industrial Revolution puzzle game on Facebook.

For those fans who can't wait until March 26 to experience BioShock, 2K is currently offering the BioShock Ultimate Rapture Edition.

For only $29.99, consumers get both BioShock and BioShock 2, add-on content for both games which is valued at more than $40, and additional never-before-seen content.

Rockstar Games is hard at work on the September 17 release of what gamers around the world are expecting to be the greatest GTA yet, Grand Theft Auto V. With the playable world (technical difficulty) Red Dead Redemption, GTA San Andreas and Grand Theft Auto IV combined, Grand Theft Auto V will offer an unprecedented level of immersion and exploration.

And finally, 2K Marin continues to make progress on XCOM, its tactical squad-based shooter based on the beloved sci-fi franchise which is planned for release during fiscal year 2014.

In closing, I'd like to join Strauss in congratulating 2K on a phenomenal string of critically and commercially successful releases.

We have a robust pipeline of announced and unannounced titles in development, and we are very optimistic about our long-term outlook for growth and profitability.

Thanks.

I'd like to now turn the call over to Lainie.

Thanks Karl.

Good afternoon everyone.

Today I'll review our results for the third quarter and then discuss our outlook for the fourth quarter and full year fiscal 2013.

All of the numbers I will be providing today are non-GAAP results from continuing operations, and all comparisons are year-over-year, unless otherwise stated.

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

Starting with our results for the third quarter of fiscal 2013, net revenue increased 71% to $405 million.

This result exceeded our outlook range of $325 million to $375 million due to the breakout success of NBA 2K13, along with better-than-expected holiday sales of catalog and digitally delivered offerings.

Catalog sales accounted for 22% of net revenue led by Grand Theft Auto IV and Red Dead Redemption.

Revenue from digitally delivered content grew 244% year-over-year and accounted for 23% of net revenue.

The largest contributor were offerings for the Borderlands franchise, in particular digital sales of Borderlands 2 and its add-on content.

XCOM Enemy Unknown, (inaudible) franchise and NBA 2K13.

Gross margin increased 1.3 percentage points to 48.1% as this year's third-quarter revenue mix was heavily weighted towards higher-priced new releases versus lower-priced catalog titles in last year's third quarter.

Operating expenses were approximately $111 million, up about $32 million versus the prior year's third quarter.

The printable drivers were higher marketing expenses to support NBA 2K13, XCOM Enemy Unknown and Borderlands 2, as well as the upcoming release of BioShock Infinite.

Interest and other expense increased slightly versus the prior year due primarily to the convertible notes that we issued in November 2011.

And non-GAAP net income was $78.8 million or $0.67 per diluted share, as compared to $29 million or $0.27 per diluted share in fiscal third quarter 2012.

This result significantly beat our outlook range which projected non-GAAP net income of $0.45 to $0.60 per diluted share.

On a GAAP basis, we reported net income from continuing operations of $70.9 million or $0.66 per diluted share.

Turning to some key items from our balance sheet, at December 31, 2012 as compared to September 30, 2012, our cash balance increased to $448.7 million.

Our Accounts Receivable balance decreased to $94.2 million, primarily reflecting cash collected from receivables associated with the release of Borderlands 2 near the end of the second quarter and the releases of NBA 2K13 and XCOM Enemy Unknown near the beginning of the third quarter.

Inventory decreased to $29.7 million, reflecting the shipment of stock on hand for the releases of NBA 2K13 and XCOM Enemy Unknown and replenishment orders of Borderlands 2. And software development costs and licenses decreased slightly to $274.1 million, reflecting the amortization of development costs for our third-quarter releases.

Now, I will review our financial outlook for the full year and fourth quarter fiscal 2013, which is provided on a non-GAAP basis.

We are increasing the low end of our outlook range for fiscal 2013 to reflect our strong recent business trends.

We now expect non-GAAP revenue to range from $1.15 billion to $1.2 billion and non-GAAP net income to range from $0.05 to $0.20 per diluted 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 today.

We expect the revenue breakdown from our labels to be approximately 25% from Rockstar and 75% from 2K.

We expect our geographic revenue split to be about 60% United States and 40% international.

We expect gross margins in the low 40s%.

Total operating expenses are expected to increase by approximately 32% from fiscal 2012, primarily driven by higher marketing expense to support 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 21% 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 $5 million, and a share count of approximately 92 million which includes 6 million of participating shares for our unvested stock-based compensation awards.

Turning to our outlook for the fourth quarter of fiscal 2013, we expect to deliver non-GAAP revenue ranging from $235 million to $285 million and non-GAAP net income ranging from $0.10 to $0.25 per diluted share.

The majority of our revenue in the fourth quarter is expected to come from the release of BioShock Infinite, continued sales of NBA 2K13 and Borderlands 2, and the release of Major League Baseball 2K13.

We expect fourth-quarter gross margins in the mid to upper 40s%.

Total operating expenses are expected to increase by approximately 23% from the prior year's fourth quarter, driven primarily by higher sales and marketing expense to support our recent and upcoming releases.

Selling and marketing expense is expected to be about 19% of net revenue based on the midpoint of our outlook range.

Our fourth-quarter outlook also reflects interest and other expense of approximately $3 million, tax expense of about $1 million, and a share count of approximately 120 million which includes 7 million of participating shares for unvested stock-based compensation awards and 26 million shares representing the potential dilution from our convertible notes under the if-converted method of accounting.

In closing, we are very pleased with our recent business performance.

Our better-than-expected results in the past two quarters and strong sales outlook have enabled us to overcome our first-quarter loss (technical difficulty) profits for the full year on a non-GAAP basis.

We expect to deliver significant revenue and earnings growth in fiscal 2014 and return to our shareholders over the long term.

Thank you.

Now I'll turn the call back to Strauss.

Our strategy of delivering a select portfolio of the highest quality entertainment experiences continues to serve us well and remains one of the core values of our organization.

We strive diligently for excellence with each release.

And while that's not a guarantee for success, it has proven to be the predictable outcome.

We continue to balance our creative passion with the rigor and discipline to deliver profits and value to our shareholders over time.

I'd like to take a moment to thank our colleagues for their dedication and hard work and our shareholders for their continued support.

And we'll now take your questions.

Operator?

(Operator Instructions).

James Hardiman, Longbow Research.

Good afternoon.

Thanks for taking my call and congrats on another great quarter.

A couple of quick questions here.

Talk a little bit about the move of Grand Theft Auto out of the spring window that you had previously talked about and into September.

Maybe give us a little bit of the puts and takes, I guess, A, from a competitive window standpoint, and B, just given the fact that there's likely to be some next-generation consoles that are going to be coming out shortly after the September release, and ultimately how we should think about the strategy as you're trying to straddle sort of the current generation and the next generation.

Thanks James.

Look, Grand Theft Auto stands alone.

It's a unique property.

And I think we're all extraordinarily excited about this title, and we think it's just going to blow people away frankly at a level I don't think anyone properly anticipates yet.

And the reason that the title is coming out in September is because that's the time required to make sure it's everything everyone expects and then some.

As it happens, I think September is a great window.

The fact is it's a very open field that early in the fall.

And as between late spring heading into the summer doldrums or early fall in an open field, that wasn't the reason the title moved, but I think it happens to be a terrific time to launch it.

And in terms of next-gen, look, as we all know, first of all, nothing has been announced yet, but assuming the consoles are coming when some of us at least think they are, that's obviously a very light installed base initially.

And I'm confident that this Company is going to have an extraordinary array of offerings for next-gen when the time comes.

Great.

And then in terms of MLB 2K, although not recently you've quantified sort of the losses there in the past.

Can you just -- it sounds like, for the first time in a while, this is going to be a profitable release for you guys in terms of baseball.

Can you help us with the comparison versus last year, how much money did you lose on that?

We previously announced the range of losses based on a legacy deal that we inherited.

I think we said it was typically around $30 million a year.

We also announced that deal entered a sunset period and ultimately expired on its own terms.

And the expectations about a new MLB release obviously reflect a new deal.

And we are very optimistic and enthusiastic about both the creative elements of that and the financial elements of that.

Yes, and as we said in our statements, we expect that title to contribute to the profitability of 2K Sports.

Very helpful.

Thanks guys.

Ben Schachter, Macquarie.

Congratulations on a good quarter.

A couple of questions and then a quick follow-up.

For GTA V, how should we think about the post-sale revenue opportunities versus previous GTAs?

And then separately, on full-game downloads, obviously you are having some success there.

Is that primarily from Steam and how do the economics differ for that versus physical retail distribution?

Thanks.

In terms of post-sale revenue opportunities, to answer that, I'd have to sort of outline what the expectations are, and I'm going to leave it to Rockstar to talk about the game and what comes after.

But as I said, we couldn't be more enthusiastic.

Our full-game downloads come from array of places, including Steam, and in terms of our margins, we've said this many times before.

They are slightly higher for digitally distributed products, but not meaningfully so.

Strauss, if I could follow up with one quick one, just high-level, when you think about the next-generation consoles, most likely they're going to be a lot more focused on media convergence at a higher level beyond just games.

How does that impact you and the other publishers?

If that happens -- and, look, the current consoles allow for all kinds of different media consumption.

But if you're talking about the consoles becoming a set-top box, first of all, I'd be happy to debate that endlessly and I could probably take both sides of the debate, as you know.

But I think the answer is it doesn't really influence us.

People have access to a full array of media choices as it is, and we're thrilled by that because the launch of new platforms is great for a company positioned the way we are positioned, and tablets have been great for us so far and mobile devices are great for us.

Our job is to make the highest quality of interactive -- highest-quality interactive entertainment and meet consumers where they are, where ever they are in the world, whatever device they want to consume our products on, and be flexible about the business models as well.

So do I think that a broad-based offering from a next-gen console affects us?

Only to the benefit of people are more engaged with something they can watch high-quality entertainment on, from us it's probably a good thing.

It's Karl.

The other piece is it also creates a potential opportunity for the console to penetrate deeper than they are right now.

If it's attractive as a broad media device, then there may be folks out there that pick it up not as a gaming machine, but in fact now they have access to a gaming machine, and it may encourage them to enter the gaming market as a consumer.

Great, thanks and good luck.

Arvind Bhatia, Sterne Agee.

Thank you very much.

I'd like to add my congratulations as well.

A couple of questions for you guys, first one on your basketball franchise, which continues to do better every year.

And I heard you guys talk about your digital revenue there.

Is there any way for you guys to help us understand what kind of attach rate you're getting, whether it's in dollars or other ways to think about, so we can understand the opportunity beyond just the disk sale.

And then similarly, on Borderlands 2, I think you said that was your largest digital contributor.

Just generally trying to get a sense of the attach rate beyond the disk.

Thank you.

Thank you.

We don't actually talk about attach rates, and ARPUs and the like.

Our focus here on a creative basis is what drives the organization, and every year the folks at Visual Concepts try to make basketball better.

This year, it is the most highly rated basketball game we've ever had with a 90 Metacritic score and the -- we sold in 6 million units -- or 4.5 million units, sorry.

And the unit sales reflect the fact that we are delighting consumers.

We've offered the opportunity to have a multiplatform experience on the go, and for the first time the opportunity to make in-game purchases.

All those things make consumers happy.

Happy consumers spend more money.

We make more money.

It's a virtuous circle.

When we tend to think of it that way, we tend to think of it less as a specific numeric attach rate, although of course we could back into that figure.

But it doesn't really tell us very much about what we are trying to do around here.

The same thing with Borderlands.

We are putting out digital add-on content because that's what consumers want.

We try to price it fairly.

We want everyone's experience of one of our games to be one where they thought they got more value than the value they paid for and that they're always happy.

And that's why Metacritic says for the past four years we've had the number one quality rating among any third-party publisher.

That's why we have the results we have, and that's why we have $450 million of cash on our balance sheet.

One quick follow-up.

This kind of ties into where we are in the cycle, etc.

You've got a great property coming up in March in BioShock.

I'm wondering.

As you review the retail landscape in the next three to six months and what you expect there, has your expectation for BioShock changed at all?

What are you seeing in terms of the preorder activity and how reliable that may or may not be at this point in the cycle?

Just for planning and modeling purposes, how are you thinking about BioShock?

That would be helpful.

Look.

The retail landscape is interesting.

If you go back just nine months, things were looking pretty bleak and there were a lot of people just saying the industry is in decline.

And we denied that was the case.

It's certainly not our view.

Our view was the industry had had some disappointments, and frankly we've had some disappointments.

This is an industry that, like all entertainment businesses, relies upon hits for its health and well-being.

And it's further complicated by the nature of the hardware console cycle.

And we are heading into the late stages of that cycle.

All that said, there's a huge install base.

And you give people what they want, they come out for it.

This quarter is living proof of that.

BioShock Infinite is shaping up really well.

The buzz is extraordinary.

The title has already won a lot of awards.

We have the highest expectations for it.

Appreciate it guys.

Thank you.

Daniel Ernst, Hudson Square Research.

Good evening.

Thanks for taking my call.

A couple of questions about digital.

One is, in the past, you have said that it really is the margins aren't all that different.

I'm wondering, given the margin progression you've had lately and the success you've had in digital, what the margin profile of digital overall is looking for the business versus package today.

And then two, as it relates to Borderlands, and even more broadly in digital, what opportunities you have in creating more of an ongoing relationship with your customers.

Certainly fans of GTA or fans of Borderlands have an affinity to that game.

But do you have the opportunity in there with things like Season Pass or others and having more of an ongoing either relationship or billing relationship versus kind of one-off downloads?

Thanks.

I'm going to answer your first question about digital and the margins.

So, we have said before that we see the margins are pretty much in line with what we see at retail margins.

But from time to time, depending on the title, if the title is a hit and there's a tremendous amount of volume to the title, depending on what the cap software was to develop the download or the marketing costs, we can see a bit of a better margin than the retail, but overall, in the grand scheme, it's pretty much in line.

As a percentage of revenue, it seems to be a bit stronger because of some of the deals that we have with third parties and how we are capturing the revenue on the top line.

Your point about an ongoing relationship with consumers is a good one because just a few short years ago, we put out a big release, and that was pretty much it.

And you put out your catalog offerings.

This company had a stated strategy to build up its catalog offerings based on the quality of what we do.

And I think, pound for pound, we have the best-selling titles per SKU in the industry, which reflects our quality.

Then we were also a standardbearer in delivering add-on content for our titles with the launch of Grand Theft Auto IV and the downloadable content packs that came along with that.

And you're wise to point out Borderlands because Borderlands itself has been a standardbearer for add-on content delivered digitally, well done.

Does that mean that these games will transition into a situation where you're constantly putting out new episodes and that bridges you from release to release?

We don't see the business shaping up that way, but it does mean that the lifecycle is extended greatly.

And we will continue to experiment with what this means creatively for consumers.

I also think, as you see tablets roll out and become the more and more important game platform, that episodic treatment of games may become much more relevant for tablets, given the perceived price point limitations for a tablet.

But we'll see if it turns out that way.

What you're hearing though is we are not rule-based; we're flexible.

We'll try anything that delights consumers as long as it fits within the rubric of the various -- the very highest quality releases in the industry.

Great, thanks for the color.

One other follow-up on next-gen, what you're thinking about, development budgets, having to develop for both the current gen and the next gen on some key titles, some of the sports titles that are annual type events.

Is that going to strain development budgets heading into next fiscal year?

Thanks.

We don't have any reason to believe our development budgets will change significantly.

And if anything, I would say we have become, root-wide, much tighter in terms of how we spend our money.

It has been a challenge; it stayed a challenge for us, and we're very, very focused on it.

So, we can't say specifically, but no, we don't expect to see a meaningful change in what it costs us to release these top-quality products.

Great, thank you.

Mike Olson, Jr., Piper Jaffray.

Great quarter.

This is Andrew Connor on for Mike.

I had a high-level question.

The installed base today is obviously very large, and it appears that the 360 and the PS3 are going to continue to be major influencers in the space.

Similar to the prior cycle transition, I'm sure there will be lots of cross-generational software for the next couple of years post-launch.

But my question is really how do you go about developing for both current and next-generation consoles when clearly the development teams want to be innovating, and yet there is a trade-off where we will have to be accommodating to the current installed base?

Thanks.

You are right, navigating this part of the cycle is a challenge.

I'm actually really pleased with the way we've done it.

Obviously, we've released our major release schedule for the coming periods, and we are excited about that.

We really can't talk much about next-gen, because we are not the ones to talk about it first.

But rest assured that, around here, we think as far ahead as we possibly can, as do our creative teams.

And everyone is really excited about the possibilities and we're working diligently on them.

And I'm very confident we will navigate the transition when it does occur successfully.

I've said before and I'll repeat it, there are four elements that you need to succeed in these transition periods.

And these transition periods present enormous challenge for companies that don't have them, and enormous benefits for those who do.

They are strong-owned intellectual property, strong creative teams in-house, strong technology, and a strong balance sheet.

We have all four.

Thank you.

Mike Hickey, National Alliance Securities.

Thank you for taking my question and congrats on a great quarter.

Strauss, historically, you've kind of been, not to put words in your mouth, but hesitant to believe in the Facebook market.

And now that it looks like Facebook is kind of resetting towards an interest in developing something for the core gamers, and given that's your development expertise, I was curious if you'd kind of reset how you think about that and if you are developing any games, core games, for Facebook.

No, I wasn't skeptical about Facebook.

I was skeptical about Zynga, to be exact.

And I remain highly skeptical about Zynga.

Facebook is an incredible platform serving hundreds of millions of people, a great promotional platform, and potentially a great game platform.

We've happily done business with Facebook.

I assume we will keep doing so.

And then on the -- for next-gen consoles, I'm hearing that the portability of current-gen is going to be a lot easier.

And so I think this question has been kind of dragged into the dirt here, but just philosophically, you see Bungee looking to do a dual generation launch, given how close they are to next-gen machines.

And it's pretty obvious that once the next-gen is announced from Sony which is likely February 20 and Microsoft probably in April, that, all things being equal, even as great as GTA is, there's going to be kind of a natural demand kickback on current-gen software as people save up dollars and excitement for next-gen.

So not to get any specific on data, necessarily on a particular game, but all things being equal, if you had the opportunity to do a dual-generation launch, would you see that as a net benefit or is it too arbitrary to even know?

Let's have a little gentlemen's bet.

But there is not one gamer who's going to sit it out of Grand Theft Auto V hoping that something down the road is going to come along that's better.

Grand Theft Auto V is going to blow everyone away, and it will be in the market in September.

In terms of strategy around current-gen and next-gen, we have to wait for the announcements.

And as I said, look, we're always looking over our shoulder.

I'm a big believer that arrogance is the enemy of continued success.

But we are planning as well as we can, and we think we are extremely well positioned.

And our creative teams have a burning desire to bring consumers what they want, when they want it, and I'm convinced we're going to keep doing that.

The last question, if you would, there is kind of nontraditional approaches to kind of controlling the living room from a games perspective and maybe outside of that, but you have Oya that is looking to kind of do a free to play [toy] model that's expected to drop in June.

You have Bowles that is looking to kind of bridge the PC to TV market.

You have a lot of people, intelligent people, trying to create effective mainstream solutions from the tablet market to the TV.

I'm just curious, when you look at these different trends, emerging technology trends, relative to your development expertise, where you see the best opportunity.

All of the above.

Our opportunities -- we obviously go where the audiences are.

So in certain instances, we are not going to spend resources unless there is a demonstrated audience.

When you have the top intellectual property in the business, you can afford to be a little reticent.

The one thing we wouldn't do would be support everything at enormous expense to our P&L and our balance sheet without knowing where the audience is going.

But we've always been willing to support meaningful initiatives very early on, even when there wasn't a big installed base.

And I imagine that selectively we'll do that.

What typically happens is our creative teams look at the opportunity and they weigh the cost and the complexity of supporting the platform with the potential audience and the economic opportunity, as well as the creative opportunity and whether it turns them on or not.

Our stated strategy though is not to be rule-based, to be flexible, and to be wherever the consumers are.

Great.

Thanks guys.

Good luck.

Brian Fitzgerald, Jefferies.

Thanks.

I'm curious if you're seeing any differentiation around engagement or purchase prevalence across kind of iOS or Android or smartphones or tablets.

And then a second question in terms of timing on MBA expansion into Taiwan and Philippines, how should we think about that?

Maybe a little color.

Is it a meaningful coding experience or is it more market timing?

Thanks.

Just to clarify, you're asking a question about whether we see different demographics across these different tablets?

Yes, maybe indirectly or I guess do you find a tablet guy purchasing more than somebody else or an Android guy purchasing less than an iOS guy.

We haven't seen a meaningful difference as yet, but it's kind of swamped by the various growth factors and different territories of the different devices and also swamped by the fact that we don't put out everything for every platform simultaneously.

So, I'm not sure we can read it that well.

We are still really in early-stage experimentation mode.

And I'm sorry, your second question?

(multiple speakers)

We haven't really talked about how we are rolling out in other territories.

We do have the rights and the ability to roll out in other territories.

And you know, we are always balancing the opportunity with the risk.

It's still early days, but we are exceedingly encouraged by what we're seeing in Asia, and we are now generating revenue and cash flow from Asia.

Great, thanks.

Edward Williams, BMO Capital Markets.

This is (technical difficulty) in for Edward Williams.

I was wondering.

Can you provide some more color on how NBA 2K online is doing in Asia, perhaps how it's chalking or what time frame you were considering it to be coming (technical difficulty) profit, you know economics differ in other regions.

It's Karl.

As we said in our comments, we are very pleased with how the metrics are tracking NBA -- in China right now on the Tencent platform.

In terms of how fast we're going to be rolling it out other territories, etc., we really don't have anything else to say about it at this point.

But like we said before, we are very pleased with the progress we've made together with VC and Tencent.

Just how did the economics differ just between the various regions?

Is it --

On the NBA game?

Yes, the online game.

Okay.

We are only in China right now.

So I would say there's no differentiation because we are only in one market.

Okay.

And then a final question on digital.

Can you remind me?

Do you recognize the gross amount or the net amount?

We recognize the net amount.

Phil Boyer, Credit Suisse.

Hi guys.

I just had a quick question.

On the digitally delivered, you guys mentioned it was 23% of net revenue.

I was wondering if you can give me any color on where most of that is coming from.

Most of it is coming from Borderlands 2 in this quarter and then also from our catalog.

Okay.

and NBA.

Sorry, and also NBA 2K13.

Okay.

Thank you.

We have no further questions at this time.

I would now like to turn the floor back over to you for closing comments.

I just want to thank everyone for attending today's call.

Obviously, we are very encouraged by the results.

We have a release we are excited about in BioShock Infinite.

We're very focused on that.

And I'm keeping the momentum going in our digitally delivered offerings and our catalog offerings.

And of course, we are all immensely excited about next year's releases, including but not limited to Grand Theft Auto V. So, it's a good time for us.

We're very encouraged, very optimistic.

And again, thank you for joining us.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation and have a wonderful day.