Take-Two Interactive Software Inc (TTWO) 2014 Q1 法說會逐字稿

Greetings, and welcome to Take-Two Interactive's first-quarter fiscal year 2014 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, Mr. Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications for Take-Two Interactive.

Thank you, Mr. Diamond, you may now begin.

Good afternoon.

Welcome and thank you for joining Take-Two's conference call to discuss its results for the first quarter of fiscal year 2014 ended June 30, 2013.

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 began, I would like to remind everyone that the statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws.

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

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

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

These important factors are described in our filings with the SEC, including the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2013 and the Company's Registration Statement on Form S-3 dated June 12, 2013.

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

I would also like to note that unless otherwise stated, all numbers we will be discussing today are non-GAAP.

Please refer to our earnings release which is posted at www.take2games.com for a GAAP to non-GAAP reconciliation and further explanation.

And now, I'll turn the call over to Strauss.

Thanks, Hank.

Good afternoon and thanks for joining us today.

During our fiscal first quarter we continued to benefit from robust demand for our recent releases, Evergreen catalog titles and expanding portfolio of unique digitally delivered offerings.

This enabled our Company to deliver results that exceeded our outlook marking the fourth consecutive quarter in which we have outperformed expectations.

These results confirm that the market for the highest quality current generation titles remain strong even as anticipation builds for upcoming launches of next-generation consoles later this year.

Accordingly, we have increased our revenue and earnings outlook for fiscal year 2014.

Turning to the key drivers of our first-quarter results, the enduring popularity of Borderlands 2 has enabled the title to sell in nearly 7 million units and it remains on track to become the highest selling release in the history of 2K.

During the first quarter, we launched three critically acclaimed and highly successful downloadable add-on packs for the title including the Ultimate Vault Hunter Upgrade Pack, Psycho Pack, and Tiny Tina's Assault on Dragon Keep.

Add-on content for Borderlands 2 including its Season Pass was the single largest contributor to our first-quarter results.

Our add-on content provides incremental revenue and profits while also helping to deepen the engagement of existing fans and to track new ones.

NBA 2K13 continues to grow its audience around the world and contributes significantly to our results.

The title is now both the highest selling and most profitable sports release in the history of 2K with more than 6 million units sold in worldwide.

In addition to being the industry's standard bearer, the success of NBA 2K13 has been enhanced by record digital sales for the franchise, including virtual goods, while our NBA 2K Everywhere Offerings bring the brand to every screen where consumers want to experience the very best in basketball.

BioShock Infinite is North America's best-selling multiplatform release so far this year according to MPD.

The title's crossed the 4 million unit sell-in mark and we expect it to become the topselling release in the BioShock franchise.

It is being supported with downloadable add-on content which Karl will discuss shortly.

We had no tentpole releases during the first quarter and therefore our industry-leading catalog was particularly integral to our results.

In addition to Borderlands, catalog sales were led by Rockstar Games' iconic Grand Theft Auto franchise and Red Dead Redemption which continue to attract new fans years after launch.

Our strong catalog remains an important competitive advantage and provides a relatively stable and predictable profit stream to complement our new release schedule.

Revenue from digitally delivered content grew 128% in the first quarter and accounted for a record 52% of our total non-GAAP net revenue.

The primary drivers were add-on content and full game downloads of new and existing catalog titles.

We also benefited from in game purposes of virtual goods and our growing portfolio of mobile offerings.

On June 20, we released XCOM Enemy Unknown for iOS, which is our first mobile version of a current generation nonsupport's AAA title and also our first mobile offering to carry a $20 price point.

The game received an outstanding 92 average score on Metacritic and was among top 10 grossing apps on iPad within the first week of its release.

The success of XCOM Enemy Unknown for iOS illustrates that consumers are willing to pay a premium price for premium entertainment experience on any platform.

This bodes well for the opportunity to deliver profitably our most immersive new AAA title to mobile platforms as they evolve.

Recently we further strengthened our already solid balance sheet through the completion of a $287.5 million offering of 1% convertible senior notes due 2018.

This enabled our Company to refinance its 4.357% -- 4.375% convertible senior notes due 2014 on substantially improved terms while also increasing our cash.

We are highly optimistic about our potential for growth over the long term.

This additional capital gives us even greater flexibility to take advantage of opportunities that we may see in the marketplace for studio or intellectual property acquisitions, strategic investments, share repurchases and other initiatives to expand our business and create shareholder value.

We are pleased with our start to the fiscal year which promises to be one of Take-Two's best ever, led by the eagerly anticipated launch of Rockstar Games Grand Theft Auto V on September 17 and the fall releases of NBA 2K14 and WWE 2K14.

Looking ahead we are well positioned to capitalize on the opportunities presented by the upcoming launches of next generation consoles.

We have an extensive development pipeline, highlighted by proven franchises and groundbreaking new intellectual property.

As a result, we expect to deliver non-GAAP profits this year, in fiscal 2015 and for the foreseeable future.

I will now turn the call over to Karl.

Thanks, Strauss.

Today, I will give an update on our recent releases and development pipeline.

Earlier this month, 2K successfully launched Sid Meier's Civilization V -- Brave New World.

A massive expansion pack for Firaxis Games' award-winning strategy title.

Providing new depths in replayability with the introduction of an international trade and a focus on culture and diplomacy, the pack has been applauded by consumers and critics.

According to IGM who gave the game 9.4 out of 10, Brave New World is the best Civilization expansion so far.

And Game Informer, who scored it 9.25 out of 10, said this second expansion cements Civilization as the marquee strategy title in all of gaming.

Congratulations to the team at 2K and Firaxis for continuing to take this fantastic franchise to new levels.

Turning to our online project in Asia, NBA 2K online developed in partnership with Tencent was launched commercially in China last October and continues to make positive strides.

Usage and player engagement are gaining momentum and according to QQ Games remains among the top 10 most played PC games at Internet cafes in China.

We are actively exploring bringing our renowned NBA 2K brand to more markets and platforms around the world.

Pro Baseball 2K, developed in partnership with Nexon Corporation, launched commercially in Korea in May.

The game offers an authentic Korean Pro Baseball simulation experience based on the MLB 2K engine and will incorporate significant new content features throughout the balance of the year.

And Civilization Online, 2K's massively multiplayer online game, continues in development with XLGAMES in Korea and our Firaxis Game studio.

The project is being led by renowned industry veteran, Jake Song, and is one of the most exciting and ambitious online game development initiatives in the region.

We continue to believe that our online projects have the potential to complement our core business with a relatively stable higher-margin revenue stream over time.

Looking ahead to our announced pipeline of releases, 2K Marin is gearing up for the August 20 launch of The Bureau -- XCOM Declassified.

Set in 1952 at the height of the Cold War, the third person tactical shooter tells the story of the founding of the top-secret XCOM organization.

In keeping with the spirit of the XCOM franchise, The Bureau fully embraces the challenges of permanent death and its calculated combat design requires players to think and act tactically.

We are confident that 2K Marin's narrative-driven vision for this title will challenge players unlike any other third-person shooter.

Ken Levine and the team at Irrational Games have been hard at work on add-on content for this critically acclaimed BioShock Infinite.

And today marks the release of the first downloadable content pack, BioShock Infinite -- Clash in the Clouds.

This pack presents players with a series of unique and intense challenges as well as many new combat opportunities set in for new areas inspired by the classic BioShock Infinite environments.

Also announced today is BioShock Infinite -- Burial at Sea, which is a two-part and on campaign featuring an all-new story for Booker and Elizabeth set in the underwater city of Rapture before its fall.

All three packs are included as part of the BioShock Infinite Season Pass and can also be purchased individually.

As Strauss mentioned earlier, Borderlands 2 continues to attract new audiences and solidify the series as one of our Company's most important franchises.

Given the overwhelming success of the title's downloadable add-on content 2K and Gearbox Software have announced plans to release even more offerings.

This fall, 2K will launch the Ultimate Vault Hunter Upgrade Pack 2, Digistruct Peak Challenge, which will raise the level cap for all six playable characters.

In addition for the first time new uniquely themed box bites with additional bonus content will be available for individual purpose and continue into 2014.

On September 17, the next installment in the Grand Theft Auto series will release from Rockstar Games.

Grand Theft Auto V will be the biggest, most dynamic and most diverse open well game the label has ever created.

Focused around a series of major heists, Grand Theft Auto V blends storytelling and great game play in new ways by allowing players to drop in and out of the lives of the game's three lead characters to experience all sides of an interwoven story.

With a strong preorder campaign the title is lining up to be both the biggest launch in the history of the franchise and Take-Two.

Grand Theft Auto V promises to be this year's must-have entertainment experience.

On October 1, 2K and Visual Concepts are poised to once again redefined the basketball genre of interactive entertainment with the release of NBA 2K14.

We are thrilled that 2013 NBA MVP, LeBron James, will make his videogame cover debut on the title.

As one of the greatest athletes of this generation, James will lead 2K's groundbreaking NBA 2K franchise into the future of sports video games with two dynamic and unique experiences for current and next-generation consoles.

NBA 2K set the benchmark for sports gaming on the current generation of consoles and NBA 2K14 will continue that legacy on next-generation consoles as our Company's first offering in the PlayStation 4 and Xbox One.

On October 29, gamers will step into the squared circle with some of the biggest names in sports entertainment for 2K's launch of WWE 2K14.

Developed by Yukes for the Xbox 360 and PlayStation 3, WWE 2K14 will be the most electrifying, authentic and comprehensive WWE videogame experience to date.

Not only will the title feature WWE superstar Dwayne -- The Rock -- Johnson on its cover, but 2K recently announced a special preorder campaign that will include the franchise debut of the legendary Ultimate Warrior.

We are confident that the addition of this pop culture phenomenon will attract both old and new members of the WWE universe and we will finally be able to create dream matches with today's top superstars.

As Take-Two heads into the next generation of gaming, we do so in the strongest position in the history of our organization.

We firmly believe that we have the best portfolio of owned intellectual property in the business.

Our world-class creative teams raise the bar for innovation and excellence in the current consoles jet cycle and as we enter the next cycle, we will leverage every facet of our new technology, both to expand our leading franchises and to create new intellectual property that will once again change the way we experience and think about interactive entertainment.

In support of these creative endeavors, we will capitalize on new business models, pursue new platforms and expand geographically to capture an even larger global audience.

In closing, I would like to join Strauss in thanking all of our employees for their dedication and hard work.

This year is poised to be one of our best and we remain highly optimistic about the long-term outlook.

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

Thanks, Karl.

Good afternoon, everyone.

I will review our results for the fiscal first quarter and then discuss our updated outlook for fiscal year 2014 and our initial outlook for the fiscal second quarter.

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 reconciliation of our GAAP to non-GAAP measurements.

Starting with our results for the fiscal first quarter, net revenue decreased 36% to $144.3 million as last year's first quarter benefited from the releases of Max Payne 3 and Spec Ops -- The Line, and we had no significant releases during this year's first quarter.

This exceeded our outlook range of $100 million to $125 million due to strong sales of digitally delivered offerings, particularly add-on content for Borderlands 2. Catalog sales accounted for 60% of net revenue, led by the Borderlands franchise, the Grand Theft Auto franchise and Red Dead Redemption.

. Revenue from digitally delivered content group 128% year over year and accounted for a record 52% of net revenue.

The largest contributors were offerings of Borderlands 2, the Grand Theft Auto franchise, NBA 2K13 and BioShock Infinite.

Gross margin increased 15.8 percentage points to 35.4% due primarily to lower development royalties and a higher mix of digital revenue during the quarter.

Gross margin was lower than expected as we recognized a $29 million impairment of capitalized software development cost during the quarter, related to a 2K title in development.

Operating expenses were approximately $94 million, down by about $45 million due primarily to the lower marketing expenses as we had no new major releases during the quarter.

In addition, G&A was lower due to the absence of the [$15] million one-time contractual obligation that was recorded in the first quarter last year.

Interest and other expense was $4 million.

A non-GAAP net loss was $47.1 million or $0.54 per share as compared to a net loss of $98.8 million or $1.16 per share in fiscal first-quarter 2013.

On a GAAP basis we reported a net loss of continuing operations of $61.9 million or $0.71 per share.

Both GAAP and non-GAAP net loss include the impairment of capitalized software development cost of $29.6 million or $0.34 per share for GAAP and $29 million or $0.33 per share for non-GAAP.

Our non-GAAP net loss of $0.54 per share exceeded our outlook range of a loss of $0.55 to $0.70 per share, primarily due to our stronger than expected digital sales, partially offset by the impairment of capitalized software development costs.

Turning to some key items from our balance sheet at June 30, 2013, as compared to March 31, 2013.

Our cash balance increased to $646.3 million.

Our accounts receivable balance decreased to $35.2 million, primarily reflecting collections on receivables associated with the release of BioShock Infinite near the end of the fourth quarter.

Inventory decreased to $27.9 million, and software development cost and licenses remained relatively flat at $293.6 million, reflecting the development efforts around our pipeline of upcoming releases offset by the impairment of capitalized software recorded during the quarter.

As mentioned by Strauss, we recently completed an offering of $287.5 million of 1% convertible notes due 2018.

At the same time, we issued a notice calling all of our outstandings 4.375% convertible notes due 2014 for redemption on August 29, 2013.

It is important to raise money when market conditions are receptive and this is a very rare and possibly short-lived window of opportunity to take advantage of very attractive terms.

Essentially we are refinancing the old convert which has a coupon of 4.375% and effective strike price of $14.95 at maturity for the new convert with a much lower coupon of 1% and a much higher strike price of $21.52.

At the same time, we have added additional cash to support our long-term growth initiative, refinance other indebtedness and/or execute on our share repurchase authorization.

From an income statement perspective we expect to reduce our annual non-GAAP interest expense by approximately $3.5 million and modestly increase our fully diluted share count once the redemption is completed in August.

Now I will review our financial outlook for the full year and second-quarter fiscal 2014 which is all provided on a non-GAAP basis.

We are revising our financial outlook for fiscal 2014 to reflect our strong first-quarter results and outlook for the remainder of the year.

We now expect non-GAAP net revenue to range from $1.775 billion to $1.875 billion and non-GAAP net income to range from $2.25 per share to $2.50 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 planned for launch during fiscal 2014.

We expect the revenue breakdown from our labels to be roughly 65% from Rockstar and 35% from 2K.

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

We expect gross margins in the low 40s.

Total operating expenses are expected to decrease by approximately 4% primarily due to lower sales and marketing expense.

Selling and marketing expense is expected to be about 13% of net revenue, based on the midpoint of our outlook range.

And we project interest and other expense of approximately $12 million, tax expense of about $9 million and weighted average fully diluted shares of approximately 127 million.

This reflects weighted average basic shares of approximately 90 million which includes an estimated 1.5 million shares to be issued to settle our 4.375% convertible note.

10.5 million participating shares for our unvested stock-based compensation award and 26.5 million shares representing the potential dilution from our convertible note under the if-converted method of accounting.

Turning to the outlook for the second quarter of fiscal 2014, we expect non-GAAP net revenue to range from $750 million to $800 million and non-GAAP net income to range from $1.20 to $1.35 per share.

The majority of our revenue in the second quarter is expected to come from Grand Theft Auto V. We expect second-quarter gross margins in the low 40s.

Total operating expenses are expected to increase by approximately 44% from the prior year's second quarter, driven primarily by higher sales and marketing expenses.

Selling and marketing expense is expected to be about 14% of net revenue based on the midpoint of our outlook range.

Our second-quarter outlook also reflects interest and other expense of approximately $3.5 million, tax expense of about $4 million, weighted average fully diluted shares of approximately 124 million.

This reflects weighted average basic shares of approximately 87.5 million, which includes an estimated 1 million shares as used to settle our 4.375% convertible note, 10 million participating shares for our unvested stock-based compensation award and 26.5 million shares representing the potential dilution from our convertible note under the if-converted method of accounting.

In closing, our better than expected start to fiscal 2014 continues the positive momentum of our business and ushers in what we believe will be a terrific year for Take-Two.

With numerous opportunities for growth and further diversification on the horizon, the organization has an incredibly strong balance sheet and the fiscal discipline to efficiently drive long-term shareholder value.

I would also like to thank our employees for their continued hard work and dedication in helping Take-Two achieve its goals today and building an even stronger company for tomorrow.

Thank you.

Now I will turn the call back to Strauss.

Thanks, Karl and Lainie.

On behalf of the entire management team, I would like to thank our colleagues for their effort in delivering a solid start to what we believe will be a fantastic year for the Company.

To our shareholders, I want to express our appreciation for your continued interest and support.

We will now take your questions.

Operator.

(Operator Instructions).

Justin Post, Merrill Lynch.

Just two questions.

You are raising revenues, it is still very early in the year.

Just what gives you most confidence that you can achieve the higher revenue forecast for the year?

What is going right, right now?

And then secondly, any thoughts on potentially keeping that share count in check now that you have done all the convertible activity?

And are there ways the Company can actually start thinking about reducing the share count?

Thank you.

We are increasing the financial outlook based on our better than expected results for the first quarter and our strong release schedule for the remainder of the year including obviously Grand Theft Auto V, our NBA title, our WWE title and our catalog titles in the rest of our release schedule.

So it is looking very sound.

In terms of our share count, remember our share count is driven by GAAP accounting.

That means we have to include things like unvested options.

It also varies, depending on whether we are in a profit or loss quarter.

It also varies with regard to the accounting for our converts.

And the answer is based on this most recent financing, our share count really hasn't changed very much at all.

And we feel the small change is actually swamped by the reduction in the interest cost and the benefit of the incremental capital in our balance sheet.

In terms of other steps to reduce the share count, I think the real question is what steps are we taking to increase value per share and the value of the Company overall.

And the steps we outlined some years ago and we have been trying to execute against.

Primarily what we have tried to do is diversify the product offerings of the Company, be a market leader in terms of the quality of our intellectual property and the quality of our individual leases for those franchises.

Every year since 2007, we have released a multimillion unit, new intellectual property.

We would like to keep doing that.

We have expanded our offerings around the world.

We have gotten into mobile business and other businesses, including the MMO business in Asia.

And we have really been a leader in innovating for product offerings whether that is in game payments or free to play games in Asia with partners.

We need to keep doing more of that.

The fact is today we reported over $600 million of cash in our balance sheet and an outlook for making $2.25 to $2.50 a share in non-GAAP earnings.

We have also said importantly that we expect the following fiscal year to be profitable and to be profitable for the foreseeable future.

If we are able to achieve that and we have a good deal of confidence that we can, then the value of the Company and of all of the shares should increase.

That is certainly our hope and expectations.

Maybe a follow-up on the first point.

Are you seeing a little bit better preorder activity than you saw a couple months ago or are you seeing more demand from retailers for some of your big releases?

Any update on how you are looking at the slate right now?

We don't talk about specific preorders, but I will tell you that the outlook is great and the feedback directly from retail is terrific.

And obviously the release that this whole Company is focused on worldwide is Grand Theft Auto V and we are very proud of the fact that we are one company even though we have a relative far-flung group of employees in multiple locations all over the world.

We all pull together to get behind all of our tentpole releases, and retail is our most important partner.

It still represents the bulk of our revenues.

Feedback, including feedback driven by preorders, has been nothing short of extraordinary.

However we don't discuss the specific numbers.

Appreciate it.

Thank you.

Arvind Bhatia, Sterne, Agee.

Congratulations on putting up another good quarter.

I know you don't want to get into any kind of numbers on GTA V, but I thought maybe you could talk about GTA IV and if you could just remind us what that title is in its first year and life to date as you continue to see success with that product.

And then also in terms of the digital strategy for GTA V, obviously a huge opportunity there.

You were doing some of that right at the start.

That would be helpful to maybe understand how frequently you will be introducing additional digital content.

Thank you.

Yes.

For Grand Theft Auto IV we have sold in about 25 million units inception to date.

I don't have the first year numbers at the tip of my tongue although I guess the answer is that Hank does.

So, we sold through about 8.5 million the first month -- about 11 million within the first month of launch in 2008 just to put it in context.

But the more important point is that we have sold in 25 million units of GTA IV inception to date and still selling now, this many years later.

And the entire franchise has sold in about 125 million.

It is over 125 million.

So I think it is also worth noting that the installed base today of the platforms for which we are releasing is roughly triple what it was when we launched GTA IV.

That isn't to say that we will see a straight line to results, but this massive installed base at a time when we think consumers are hungry for Grand Theft Auto V is very good news indeed.

In terms of digital content, we are going to let Rockstar Games talk about digital plans for the title.

That is the appropriate place for us to talk about to what we are doing for the product and what we are doing for marketing.

But suffice it to say that we have been a leader in digital add-on content.

In the quarter that we just released our biggest contributor revenue was downloadable add-on content for Borderlands 2. We think we really do have a point of view about how best to delight consumers.

Not just at the time of the initial release, but also on an ongoing basis.

And what we have learned is that downloadable content does not work for every title in the market.

It doesn't even work for all of our titles.

It works when we put out something really great and then we put out more stuff that people really, really like.

And once again it comes back to delighting consumers.

That is Rockstar Games' specialty.

That is what Grand Theft Auto V is all about.

A delightful consumer experience that we think is going to amaze everyone who plays it and you will stay tuned, but we feel really good about it.

Thank you.

Mike Olson, Piper Jaffray.

You mentioned just now a triple D installed base today versus when GTA IV shipped.

And is there anything you can say about what your expectations are for GTA V attach rates in the current environment and with the much larger addressable market?

And maybe if not specifics on attach rate just maybe how you are thinking about why attach rates could be different from when GTA IV shipped?

Well, we are at a different point in the console cycle and there's no doubt that attach rates are lower at the tail end of the console cycle in general.

Because if they weren't, then I would be telling you that we are going to -- I mean I guess I would extrapolate and say that we would expect to sell 75 million units of GTA V. Which would be lovely, but we are not saying that today.

And obviously our financial outlook does not reflect that number.

Why do attach rates decline?

Because this is a sine curve business and when people get new hardware they overconsume.

As they get used to having the hardware they underconsume.

It has always been the nature of the business for nearly 30 years.

And I don't really expect it to change.

That said, we are putting out an extraordinary experience, and we do think that avid players and even casual players who own these consoles and some who currently don't own the consoles will own this title.

And we will be there to serve and meet their needs.

Thanks and can you talk about the new day and date release features of the next-gen consoles?

Is that something that you guys are excited about or more neutral on and I guess could you share what percent of your frontline titles tend to be downloaded directly today?

I am assuming it's near 0%.

No, it is not near zero.

We definitely have full game digital downloads and they are meaningful to us.

And obviously we will let the console companies talk about their own policy.

They set them and we adhere to them because they are our partners and that's the business that they are in.

But our own view is that meeting consumers where they are is the best way to run a business.

And you want to make sure that your policies reflect the way people like to consume product.

We have always been ecumenical about platforms, channels, geographies, and business models.

We are not a rule-based company.

Our goal is to delight consumers and the way we do that is by being flexible.

Bringing them the best products wherever they are on whatever platform they want to consume it.

So we are -- we try to be good partners with the console makers.

They are our bread and butter.

We support them as they do us.

We recognize that they set these policies and we encourage the policies to be as open-minded as possible.

But you can rest assured that we will always be, in our view, a leader in being flexible and consumer-friendly within the purview of the policies of the console makers set.

Thank you.

Eric Handler, MKM Partners.

Two digital items for you.

One, can you give us a sense of how much of your additional business was mobile?

And secondly, maybe you could give us a sense for the digital business.

How much came from Asia?

We don't really break it out but we did say that the biggest drivers were full game downloads and downloadable content.

But apart from that we don't break it out with more specificity.

Okay.

Thanks.

Daniel Ernst, Hudson Square Research.

Two questions.

First, on the console cycle.

Can you talk about what your expectations are for the size of the install base cycle on cycle and what your expectations are for the initial selling that I think there is some expectations that console makers will not repeat past mistakes and have supplies.

If you have any view on that within the industry, whether the early part of the console cycle could be bigger than the early part of the last one?

And whether the new -- this new console cycle could be as large or be smaller than the last one?

And then on digital, your commentary around the relative success that you had with a $20 [tablet] game I wonder if you could opine to the future, Strauss, as to when we think we could have a tablet game that is as is immersive as a console game and what that point you would be able to support console type prices.

Can you get the $60 game when you deliver a game that is as immersive on a tablet as it is on a console or a PC?

Thanks.

Yes.

The second question first.

The console -- the tablets still aren't powerful enough to run our console titles in their full experience and in the way they want.

But we think that is just a moment in time.

We think that if you believe in Moore's Law and we do, it is a matter of just a couple of years before a tablet will be a terrific entertainment platform.

It already is a great entertainment platform for watching a TV show or watching a movie.

You know, we do need an outboard controller that becomes an industry standard that works for consumers.

But I have every reason to believe that a tablet will be a great game platform and we will be right there.

I do think we are a couple of years away.

To your point about pricing, we don't tend to spend a lot of time talking about pricing.

The truth is that consumers pay for what is of value to them and, obviously, we create a product that is very expensive to make and market.

And its price point reflects the intersection of those two things.

If -- there really is no reason why, if you deliver a great expense on a tablet, we should be price-limited.

But if we were, we would have to figure out a different business model and we are pretty flexible people and I'm sure we would be able to do that.

So we are listening to consumers and will give them what they want.

Obviously the experience we currently deliver to consoles has a certain price and it also has a certain cost.

And consumers push back on the individual bite size of a price because it is on a tablet.

That wouldn't make very much sense, but if it happened we could work within those parameters as well by altering and tailoring our product offering.

In terms of the console cycle, we are quite optimistic.

We don't share our projections or expectations and we have only announced one title so far which is the NBA title for next-gen, so we really haven't talked a whole lot about it, but yes we are pretty optimistic and we are going to leave projections to the analysts.

Thanks.

Ben Schachter, Macquarie.

Congratulations on some good momentum going into the Grand Theft Auto launch.

Couple of questions on GTA and then one for Lainie.

Strauss, can you talk about the marketing plan, how it is going to defer versus what it was for GTA IV, any changes notably between international and domestic?

And also, I know you can't talk about the digital content plans, you will let Rockstar do that, but can you talk about from a pure financial point of view, what does the ARPU look like?

Or what does the lifetime value of a GTA V consumer look like versus the GTA IV consumer?

And then, Lainie, could you let us know what you think the net cash will be by the end of the fiscal year?

Thanks.

In terms of GTA marketing, again, this is really something that Rockstar is better first to talk about than we are.

But we have a lot more marketing tools at our disposal than we did back when GTA IV launched.

I mean online is a much bigger component of most marketing budgets, not just ours, but across the industry.

There is also other outlets that we use.

We are very heavy in retail.

Preorders are a big part of our marketing strategy.

So there are some differences, but rest assured the Rockstar folks have put together an incredibly comprehensive marketing program that types in all of our marketing partners including third-party media sources and retail as well.

In terms of the digital content place, that is something that we are ultimately in terms of lifetime value of consumers, et cetera, that is something we don't discuss.

And for the cash at the end of the year, we don't provide cash flow projections, but we are going to be cash flow positive for the remainder of this fiscal year.

Doug Creutz, Cowen and Company.

It looks like you be your OpEx guidance in the quarter by about $10 million and that you lowered your full-year OpEx guide by about $30 million.

And I was wondering if you could talk about what is going on there.

And separately the game that you took the write-down on, is that a game that was canceled or one that remains in development?

Thanks.

For the OpEx, specifically for this quarter the beat over last quarter was due to the one-time write-off that we had -- or the one-time contractual obligation that we had last year.

And then for the full year it is just an overall mix of where we are seeing the business and bottoms up reforecasting for the remainder of the year.

Yes and in terms of the write-down for software cost, capitalized software cost we are not providing more clarity on that.

Okay.

Thank you.

Edward Williams, BMO Capital Markets.

This is [Sun Funden] for Edward Williams.

Two questions.

One, can you tell us a bit more about what your financially earned cash balance is particularly after 2K is released and then, two, if you can share any thoughts on how you are allocating development dollars across legacy consoles or current chain consoles versus next-gen?

Thank you.

I will take the first part of the question.

On the cash balance we just mentioned that we don't provide cash flow projections, but we plan to be cash flow positive for the remainder of the year.

And in terms of allocating debt across current gen, next gen, we are obviously not going to tell you that specifically.

But we can tell you that we are supporting both next gen and current generation -- current gen's console significantly.

(Operator Instructions).

Mike Hickey, The Benchmark Company.

Great job on your quarter.

Just curious, Strauss, on your philosophy of some of your bigger games over next gen platforms.

Do you expect any sort of change into how you pace the [iterations]?

I know historically you have always left it up to your developers.

So with new tech and maybe some more synergy in terms of or less difficulty in terms of competing platforms do you think you will be able to aerate these any differently?

Look, it is possible that we are going to find that developing for this next gen will be more efficient.

It is possible we will find that it is easier to develop for multiple platforms simultaneously.

It remains to be seen.

The bulk of our timing of releases, though, has been driven by making sure that we put out really great titles and making sure that we don't overwhelm audiences and burn out our franchise.

Our goal is to try to create permanent franchises.

That is a unique goal in the industry.

Our competitors do not see it that way.

Our competitors view is that our franchises have a certain life and at the end of that life you move onto the next thing.

So you better make hay while the sun shines.

Our view is to the contrary.

The best franchises are permanent franchises.

Outside of our business you can look at James Bond for example.

And it has been our goal not just to preserve and grow the Grand Theft Auto franchise, but also to build other franchises that we think can be permanent whether that is the Red Dead franchise or the Borderlands franchise or the BioShock franchise or others.

Civilization, for example.

So I don't — I think in certain instances we would like to see releases paced a little more closely together.

I don't really think next gen is going to change the production approach sufficiently that that will be the difference that makes a difference.

Thank you and just curious on your view on your competitive profile.

Obviously at E3 this year there seemed to be a lot more representation within the Open World experiences and of course we are on the front end here of an emerging console cycle where there can be big share shifts.

So curious how you see your competition.

We have a healthy respect for our competition.

We don't take anything for granted.

We are fond of saying that we think arrogance is the enemy of continued success.

We are always looking over our shoulders and not because we are worried about someone eating our lunch, but because we are worried about making sure that we always provide the best experience to consumers, that we are always known as the standard bearer for what is the very best in interactive entertainment.

And to do that we have to be mindful of what our competitors are doing and what our consumers want and always give them what they want and then some and to do so at a fair price.

So, we have the highest weighted average Metacritic ratings in the business.

And yet, we know we can always do more.

Our basketball title, for example, is the highest rated sports title in the business.

It has been for 12 years, the number one basketball title and yet we still want to do more.

We are very self-critical.

We are always trying to push the envelope.

So, are we worried about our competition?

Yes.

But what do we focus on?

We focus on our own knitting and making sure what we do is the very best.

Thank you.

Good luck with GTA.

Brian Fitzgerald, Jefferies.

Thanks.

Catalog was a key driver for the quarter at 60% of net rev and digital is also growing nicely up 130%-ish.

How much of the digital is catalog?

Have you broken by that or how do you think about that?

Or is there more shift around based on the release lineup?

And maybe one follow-on after that.

Thanks.

We don't break it out specifically, but we did say that Borderlands 2 downloadable add-on packs was a big driver in the quarter.

So it isn't all just catalog.

It is good that our catalog is doing so well.

It is also good that digital is doing well.

It is a mixture of both.

And you had another question.

Yes, another quick one.

So free to play, how do you think free to play is driving digital also?

Are the conversions trending better or how you think about that in terms of driving your digital side?

Well, we don't -- our free to play business is largely limited to Asia.

And that business is developing nicely as Karl mentioned.

We expect it to be a meaningful contributor going forward, but it is already turning into a profitable contributor which is awful nice.

That business has really unfolded exactly as expected.

We mitigated our risk and the risk didn't materialize and we are beginning to see the reward.

But outside of Asia we basically have business which people pay for and that is true pretty much across the board for us.

We are open-minded about business models.

Free to play as a business model in the States has been pretty checkered.

If you take a look at how some of our competitors have done, that have tried to play in that space, there was a brief moment in the sun and that moment has clearly past.

We were highly skeptical about that business and said so publicly and in any case it was not an area in which we had great expertise.

So we continue to play in the mobile space.

The bulk of those games are sold and we continue to be open-minded about business models as they develop.

Excellent.

Thanks.

Colin Sebastian, Robert W. Baird & Company.

Congratulations on the quarter.

Just a couple of follow-ups, I think.

On NBA 2K14, wondering if there will be any shipments included in the September quarter?

And related to that, can you talk about your expectations for that franchise or that title, relative to last year's version?

And then secondly, does the pending investment in Activision from Tencent have any impact on your relationship there?

Thanks.

I will take the Activision piece first.

We don't think there has been any effect at all on our relationship with Tencent based on their investment in Activision.

That is a pretty easy one.

In terms of NBA 2K14, can you repeat that question again?

I think I missed it.

Sure.

Will there be any shipments of that title included in the September quarter and then also your expectations for the game relative to last year's version?

In terms of the September quarter, there wouldn't be because the game isn't released in September.

And in terms of our expectations versus the last one, obviously we are very excited about it.

The great thing about 2K is the NBA the [VC] team is at every single release.

They are pushing themselves.

Strauss talked about competition and always looking over our shoulder to see who is behind us.

And in fact the team at Visual Concept has always been they are in competition against themselves.

And every iteration they try to take the game to the next level and this NBA 2K14 is no exception.

Obviously we are very excited about the release.

We have got a great marketing plan around them.

We have got a great deal with LeBron.

So we think we are going to generate a ton of consumer buzz and we have very high expectations for the title.

In terms of specifics, can't give you those.

All right.

Thanks.

Arvind Bhatia, Sterne, Agee.

A clarification question.

The full-year guidance, does that include the impairment charge or does not?

Yes, it does include the impairment charge.

Great.

That's all I had.

Thanks.

There are no further questions at this time.

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

Just we would like to thank our shareholders and everyone else for attending the call today.

We appreciate the support.

We feel like we are off to a good start.

We have a lot of wood to chop for the remainder of the year, but things are looking very positive and promising.

So thank you very much.

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

You may disconnect your lines at this time and we thank you all for your participation.

Good day.