Take-Two Interactive Software Inc (TTWO) 2014 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Take-Two third-quarter fiscal 2014 earnings conference call.

(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.

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 2014 ended December 31, 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 begin, I'd 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 Form 10-Q for the fiscal quarter ended September 30, 2013.

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

Please refer to our earnings release for a GAAP to non-GAAP reconciliation and further explanation.

Our earnings release and filings with the SEC 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 our business continued to thrive during the fiscal third quarter, and we again delivered better-than-expected results.

This was driven by robust holiday demand for Grand Theft Auto V; the record-breaking launch of NBA 2K14; the successful release of WWE 2K14; and strong growth in revenues from digitally delivered content.

While others in our industry have experienced softness in current-gen sales, we continue to benefit from significant demand for our titles, reflecting consumers' appetite for the highest-quality entertainment.

Grand Theft Auto V continues to expand its audience around the world, demonstrating how Rockstar Games has taken their series in our industry to new heights for innovation and excellence.

Upon release the title shattered entertainment records, selling through $800 million in 24 hours and over $1 billion in only three days.

And it was the best-selling videogame of 2013, according to the MPD Group.

To date, Grand Theft Auto V has sold-in more than 32.5 million units worldwide, and demand remains high as millions of consumers enrich their experience through dynamic and evolving world of Grand Theft Auto Online, which I will discuss in more detail shortly.

The success of Grand Theft Auto V is only part of Rockstar Games's unparalleled track record.

To date, the label has sold-in nearly 250 million games worldwide across multiple hit series.

2K built upon their legacy of delivering the highest-rated and top-selling basketball video game with their current next-gen releases of NBA 2K14.

The title has become the fastest-selling release in the history of our NBA 2K franchise, with sell-in to date of more than 5 million units across console and PC.

I would like to congratulate the team at Visual Concepts, who simultaneously created two outstanding products for current and next-gen platforms.

Our WWE franchise has quickly proven to be a successful addition to our portfolio.

Sales of WWE 2K14 have exceeded our expectations, and the title is being supported with add-on content, including the Season Pass, featuring many of fan-favorite WWE superstars and legends.

We believe there is a meaningful opportunity to grow this series by further leveraging 2K's marketing power and development expertise.

Revenue from digitally delivered content grew 42% year over year to $132.8 million.

Nearly half that revenue was derived from our current consumer spending, including virtual currency, add-on content, and online gaming.

Creating opportunities to drive ongoing engagement with our titles after release is a key strategic focus for our Company and is becoming an important driver of additional revenue and profits.

It also helps to strengthen our results between front-line releases while providing additional entertainment to consumers.

Approximately 70% of consumers who have played Grand Theft Auto V while connected to the Internet have played Grand Theft Auto Online since its launch on October 1. As a result, Grand Theft Auto Online was the single largest contributor to our digitally delivered revenue in the third quarter.

While it is still early, we are highly enthusiastic about the future of Grand Theft Auto Online as its global audience continues to grow.

Online play contributed to the success of NBA 2K13, and we have seen continued growth with this year's release of NBA 2K14.

The majority of NBA 2K14 fans are actively engaged in online connected experiences, including multiplayer gaming.

In particular, consumers are buying virtual currency to customize their players with clothing and abilities.

They are also forming teams with friends to play in online competitions.

Add-on content is also a key component of recurring consumer spending.

During the third quarter we released successful downloadable content for BioShock Infinite, Borderlands 2, Sid Meier's Civilization V, and WWE 2K14.

Borderlands 2 is a prime example of how we are able to generate substantial revenue and profits from add-on content over an extended period.

In the 16 months following the title's launch, we released 9 substantial downloadable offerings, dozens of smaller character customizations, and we plan to release more downloadable content in the coming months.

This is in addition to packaged good; add-on packs; and most recently, a Game of the Year Edition.

The popularity of add-on content for Borderlands 2 was an important contributor to the title's becoming the highest-selling release in the history of 2K, with more than 8.5 million units sold-in to date.

Our online projects in Asia, particularly NBA 2K online in China, are also generating growth in recurrent consumer spending and contributing to our results.

We will continue to focus on developing additional offerings that promote engagement with our titles beyond initial release.

This will both deepen our relationships with consumers and boost revenue and profits over time.

In addition to recurrent consumer spending, full-game downloads across console, PC, and mobile platforms contributed to the growth in our revenue from digitally delivered content.

During the third quarter Rockstar Games released Grand Theft Auto San Andreas for a variety of mobile platforms, including iOS and Android.

Our ability to bring our popular catalog title to mobile platforms enabled us to grow our audience and generate incremental revenue and profits with modest development costs and virtually no marketing spend.

As I have said many times before, being good is simply no longer good enough.

To succeed in our industry one must aspire to and deliver greatness.

Our positive momentum over the past year speaks to our focus on consistently delivering hits.

I am particularly proud that Take-Two was the top video game publisher of 2013 according to the MPD Group.

This was a tremendous achievement, and I'd like to congratulate Rockstar Games, 2K, and our entire Take-Two team for making this happen.

Turning to our balance sheet, we ended the third quarter with cash of almost $1 billion.

We're committed to driving long-term shareholder value, including by returning capital to our investors.

To that end, we have repurchased $277 million of our stock during the third quarter.

We will continue to explore ways to create value through capital deployment, both by investing to grow our business and potentially returning additional cash to shareholders.

As a result of our better-than-expected third quarter results, we are increasing our full-year outlook for fiscal 2014, which is poised to be record year for our Company.

We have projected non-GAAP net revenue of nearly $2.4 billion and earnings of more than $4 per share.

Looking ahead, we have a robust pipeline of both new intellectual properties and offerings from our proven franchises in development, including more than 10 unique titles for the next-generation consoles.

We believe that the initial success of Xbox One and PlayStation 4 bodes well for our industry and foreshadows what promises to be a vibrant hardware cycle.

In addition to capitalizing on these new consoles, we're continuing to invest prudently in emerging platforms and business models that complement our core focus.

With a proven strategy, world-class creative teams, the strongest portfolio of owned intellectual property in our industry, cutting-edge technology, an unwavering commitment to quality, and a solid financial foundation, we are positioned to deliver non-GAAP profits in fiscal 2015 and every year for the foreseeable future.

We are committed to delivering value for our customers and returns for our shareholders over the long term.

I will now turn the call over to Karl.

Thanks, Strauss.

Today I will provide an update on our development pipeline.

In Grand Theft Auto V Rockstar Games has redefined the term blockbuster -- not just for gaming, but also for the entire entertainment industry.

And since its launch in October, millions of consumers have engrossed themselves in Grand Theft Auto Online, which has quickly become a living, breathing universe that continues to grow.

In addition to new game play and in-game items released by Rockstar Games, the creator tools enable players to enhance their game play experience by developing their own content.

To this functionality the player community has already created and published over 2 million death matches and races.

Consumers can look forward to more content from Grand Theft Auto Online in the future.

In addition to supporting Grand Theft Auto Online, Rockstar Games plans to release substantial, story-driven downloadable add-on content for Grand Theft Auto V. They will have more to say about this in the coming months.

For those who have not yet experienced the award-winning Sid Meier's Civilization V or XCOM: Enemy Unknown from Firaxis Games, 2K will launch complete editions for each title for the PC, featuring the full game plus all previously-released add-on content.

These editions represent a terrific value for consumers and another example of how we extend the lives of our franchises over time.

We are also pursuing new opportunities to leverage our successful catalog offerings.

2K recently entered into a partnership with Bethesda to create two bundles featuring each publisher's renowned titles in a single package.

On February 11 2K will release the Borderlands 2 and Dishonored bundle and the Elder Scrolls V: Skyrim and BioShock Infinite bundle, each available for the Xbox 360, PS3, and PC.

Also coming up, 2K will support BioShock Infinite with the release of BioShock Infinite: Burial at Sea, Part Two, the second add-on campaign set in the underwater city of Rapture before its fall.

As mentioned by Strauss, we have a strong development pipeline, including more than 10 unique titles for next-generation consoles, with multiple releases plan for fiscal year 2015.

Last month 2K and Turtle Rock Studios, creators of the cooperative shooter classic Left 4 Dead, unveiled Evolve, an exciting new intellectual property that is poised to be a generation-defining multi-player experience.

Evolve, which will be available this fall for Xbox One, PlayStation 4, and PC, expertly blends cooperative and competitive multi-player experiences as a team of four hunters face off against a player-controlled monster.

Set on a futuristic, deadly alien planet, gamers hunt their prey in adrenaline-pumping 4-versus-1 matches.

Players will experience Evolve as either a first-person shooter when playing cooperatively the four hunters or in the third person when playing as a monster, providing unique game play experience.

2K has kicked off the preorder campaign for Evolve, featuring the Monster Expansion Pack, which includes the savage Goliath skin at launch and a new monster character as soon as it becomes available after the game's release.

In addition, during fiscal 2015 consumers can look forward to exciting next-generation releases from our NBA 2K and WWE franchises, as well as other unannounced titles that promise to raise the bar for excellence.

We will have more to share about our titles in development throughout the next several months as we head into E3.

As we enter the final months of fiscal year 2014, we are proud of our accomplishments and proven ability to set new standards for creativity and innovation.

Looking forward, we are more enthusiastic than ever about our outlook to continue to deliver our industry's most groundbreaking products, which will translate into revenue and profits for our shareholders.

In closing, I would like to join Strauss in thanking all of our colleagues for their contributions to our continued success.

I will now turn the call over to Lainie.

Thanks, Karl, and good afternoon, everyone.

Today I will review our results for the fiscal third quarter and then discuss our updated outlook for fiscal 2014 and our initial outlook for the fiscal fourth 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 a reconciliation of our GAAP to non-GAAP measurements.

Starting with our results for the fiscal third quarter, net revenue increased 90% to $767.7 million.

This exceeded our outlook range of $650 million to $700 million, due primarily to the continued success of Grand Theft Auto V; the record-breaking launch of NBA 2K14; and the strong performance of Grand Theft Auto Online.

Revenue from digitally delivered content grew 42% year over year and accounted for $132.8 million of net revenue.

The largest contributors were the Grand Theft Auto series, the NBA 2K franchise, and offerings with Borderlands 2 and BioShock Infinite.

Catalog sales accounted for $113 million of net revenue, led by Borderlands 2, the Grand Theft Auto franchise, XCOM: Enemy Unknown, BioShock Infinite, and Civilization V.

Gross margin decreased 3.4 percentage points to 44.7%, due primarily to higher internal royalties.

Operating expenses were approximately $127 million, up by about [$16] million, due primarily to higher marketing expenses to support our third-quarter releases; continued marketing spend for Grand Theft Auto V; and higher personnel expenses due to our increased headcount.

Interest and other expense was $0.7 million and non-GAAP net income was $210.7 million or $1.70 per share as compared to $78.8 million or $0.67 per share in fiscal third quarter 2013.

This exceeded our outlook range of $1.20 to $1.35 per share, due primarily to our better-than-expected results from operations.

On a GAAP basis, we reported revenue of $1.86 billion and net income from continuing operations of $578.4 million or $4.69 per share.

Turning to some key items from our balance sheet at December 31, 2013, as compared to September 30, 2013, our cash balance increased to $972.2 million.

Our accounts receivable balance decreased to $189.5 million, primarily reflecting collection of receivables associated with the launch of Grand Theft Auto V near the end of the second quarter.

Inventory decreased to $45 million, primarily due to the launch of NBA 2K14 in early October and shipments for replenishment orders of Grand Theft Auto V. And software development costs and licenses decreased to $193.8 million, reflecting the amortization of development costs for our fiscal 2014 releases.

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

We are increasing our financial outlook for fiscal 2014, primarily to reflect our strong third-quarter results and lower share count due to our repurchase of 16.24 million shares in November.

We now expect non-GAAP net revenues to range from $2.35 billion to $2.38 billion and non-GAAP net income to range from $4.15 per share to $4.25 per share.

These would be record results for our Company.

Turning to the details of our full-year outlook, we expect the revenue breakdown from our label to be roughly 70% from Rockstar Games and 30% from 2K.

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

We expect gross margins in the low 40%s.

Total operating expenses are expected to remain approximately flat from the prior year.

Selling and marketing expense is expected to be about 10% of net revenue, based on the midpoint of our outlook range.

We project interest and other expense of approximately $11 million, tax expense of about $14 million, and weighted average fully diluted shares of approximately 121 million.

This reflects weighted average basic shares of approximately 84 million, 11 million participating shares for our unvested stock-based compensation awards, and 26 million shares representing the potential dilution from our convertible notes under the if-converted method of accounting.

Turning to our outlook for the fourth quarter of fiscal 2014, we expect non-GAAP net revenue to range from $170 million to $200 million and non-GAAP net income to range from breakeven to $0.10 per share.

The majority of our revenue in the fourth quarter is expected to come from NBA 2K14, Grand Theft Auto V, Grand Theft Auto Online, Borderlands 2, and WWE 2K14.

We expect fourth-quarter gross margins in the low 50%s.

Total operating expenses are expected to decrease by approximately [16%] from the prior year's fourth quarter, driven primarily by lower selling and marketing expense.

Selling and marketing expense is expected to be about 15% of net revenue based on the midpoint of our outlook range.

Our fourth-quarter outlook also reflects interest in other expense of approximately $2 million, tax expense of about $1 million, and weighted average fully diluted shares of approximately 115 million.

This reflects weighted average basic shares of approximately 77 million, 12 million 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.

Today Take-Two stands on the strongest financial foundation in the history of our Company.

This was achieved through our ability to balance leading-edge creative endeavors with a disciplined approach to capital investment.

We are confident that our continued focus will enable Take-Two to deliver profits and returns for our shareholders over the long term.

Of course, none of this would be possible without the hard work of our entire team, who I would like to thank for their dedication to the Company.

Thank you.

Now I will turn the call back to Strauss.

Thanks, Karl and Lainie.

On behalf of our entire management team, I would like to thank our associates for their ongoing commitment to excellence.

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

We will now take your questions.

Operator?

(Operator Instructions) Justin Post, Merrill Lynch.

Can you talk a little bit -- kind of remind us of what you said about the GTA Online usage?

I think you said 70% of the people who are online connected have played online -- repeat that.

And then what are people doing in there and paying for so far?

And what is your outlook going forward?

Thank you.

Justin, it is Karl.

What we said is there are -- 70% of the folks who have played the game with an Internet connection have played GTA Online.

And those that are paying, what are they paying for currently?

And how do you see the opportunity going forward?

Well, first of all, we're very optimistic about the opportunity.

Things are going very well, and we're very happy with how things are going in GTA Online.

Lots of great content's out there already, and a lot of great content on its way.

So we obviously have a great -- a very positive outlook for the future.

In terms of what they are doing online, I would have expected that you would have played it by now, but otherwise, there are a lot of different ways that you can enjoy the content online.

There are predetermined death matches -- your standard death match; your races.

In terms of buying, we have the GTA cash packs.

So in order to experience some of the game, you can buy a cash pack, and that allows you to unlock certain content, items that you can buy, et cetera.

So it is a standard online transaction model that you would see.

Okay, great.

And then when you think about your big franchises -- moving them to mobile over time, how much untapped opportunity do you see for the Company?

Thanks.

We don't really distinguish between mobile and not-mobile.

Our view is that a platform that a consumer wants to use to experience the best in interactive entertainment is good for us.

And the only question is what are the processing limitations, the graphic limitations -- which is why we put out some of our older titles on tablet, but not as many of our newer titles, because of the processing limitations on the power of those tablets as they currently exist.

If you believe in Moore's Law, and I do, then you believe that tablets will be tantamount to PCs pretty soon.

And I have every reason to believe that if that is where people want to consume video games, that is where we will be.

James Hardiman, Longbow Research.

Congrats on another great quarter.

So just to circle back to the last couple of questions on GTA Online, you had a couple of starts and stops with respect to the online currency for GTA Online.

Do you think that you have made up for any sort of lost revenue?

And can you just take us through the timing of that -- when that went back online?

Was that towards the end of the quarter?

And is there maybe some catch-up to happen here in the March quarter?

Yes.

I have made it plain that we have been learning as we go along in this area.

And our primary goal is to delight consumers and create a great experience.

As you know, GTA Online is a free-to-play experience.

And there is opportunities for recurrent consumer spending within the game -- no obligation, of course.

But we have sold-in 32.5 million units of Grand Theft Auto V. We have enjoyed an extraordinary economic result.

But the starting point for that economic result is delighting consumers -- giving them a fantastic experience.

And that is our focus in GTA Online.

And the reason that we offer an opportunity to spend money in the game is that is coordinated with a great experience.

We are not making decisions in order to extract value.

We are making decisions to delight consumers.

And that includes creating value.

Yes, we had some issues with the currency.

Those issues have been addressed.

And we're not really focused on whether there is catch-up or anything of the sort.

As long as people keep loving GTA Online, it's going to be great for us.

Great.

And then along those same lines, I don't know how much you are querying your user base or following any sort of metrics that would just maybe give us some insight as to whatever color you might have with respect to just how sustainable you think this GTA Online experience can be.

Maybe through the release of other high-octane games that have come out within the industry, did we see a drop in the number of people that were online?

0

James, I am so thrilled to be asked to answer a how high is up question, because it is sort of novel for us around here.

Look, we are thrilled.

We are just thrilled.

And we certainly are following metrics very carefully, and we're growing our expertise every day.

But we made it plain that we prefer to expend resources after we see revenues, not before.

It has protected us greatly.

We are very disciplined.

And that means we are learning as we go.

But the watchword here is about delighting consumers and keeping them engaged, not about monetization.

The monetization comes with the engagement.

My own view is I feel very, very optimistic about GTA Online; and I think there is plenty more opportunity.

And we have made no bones about the fact that we have expectations for GTA Online in the fourth quarter, for example.

So clearly, we have expectations going forward, but we are not at a point yet where we want to share the metrics.

Very helpful.

And just last question, Strauss: the performance of your Company over the past six months, certainly since GTA has come out, has been through the roof.

Hopefully tomorrow will be a different story, but your stock has been essentially sideways over that time.

Are you surprised that your stock hasn't done more?

It seems like you have gotten out a lot more and talked to investors.

What would they like to see to reward your shares more commensurately with your performance?

And are there two ways to skin this cat?

You're sitting here with cash that represents half the market cap of your Company.

What is in tap?

What could you potentially do to get people more excited about the shares, just given your cash position?

I have never met a CEO who didn't think his or her stock was undervalued.

We're not in the business of pumping stock.

We are in the business of trying to be the most creative, the most innovative, and the most efficient entertainment Company that exists.

And I'm really proud that in the last seven years, every year we have launched a new multi-million unit selling franchise.

I'm really proud that we have the best collection of owned intellectual property in the business.

I am incredibly gratified that I believe we have the top collection of creative talent within our four walls and that seem to be happy to work here; and, moreover, that they love following their passions.

And that -- the collection of that strategy and that execution, as Lainie said, has yielded an extraordinary financial result.

And we sit here today, once again beating our guidance for the sixth quarter in a row; once again, increasing our outlook now to $4.15 to $4.25 a share.

I sit here with the ability to say in confidence that we expect to be profitable in the next fiscal year on a non-GAAP basis and profitable on an ongoing basis for the foreseeable future.

And finally, we have nearly $1 billion in cash.

And based on the way we account for our convert -- one could argue that is in the context of no debt, since we account for our converted notes returned in equity.

That is an amazing place to be in what is in a relatively short time since we came to this party.

And we are immensely grateful for it.

What do I surmise?

Look, sometimes the market takes a long time to come to a view of where we are and where we're going.

And once I asked one of our very sophisticated investors why the stock had gone down, and he said to me: more sellers than buyers.

So I am convinced that if we keep executing on this vision; and our entire team stays focused on what they are passionate about; and we all work really, really hard, I am convinced that there will be a narrowing gap between our reality and how the market sees us.

Agreed.

Eric Handler, MKM Partners.

A couple of questions for you.

With regards to GTA Online, you said 70% who have played with an Internet connection have played GTA Online.

Just curious, what percentage of that 70% have actually been monetized with some type of micro-transaction?

And then, secondly, with regards to your balance sheet, if you just look at it from a net cash perspective -- and let's treat the converts as debt -- you've got over $500 million of cash.

Is there a certain amount of cash that you want on hand at all times for operational purposes?

And it looks like you really didn't buy back any more stock after the announcement that you made in late November about repurchasing the Icahn shares, and then 4 million some-odd shares on the open market.

Have you bought any since that time?

We're not talking about the percent that have monetized.

We're not disclosing those metrics.

And that is primarily because it is still a work in progress.

In terms of the balance sheet, there absolutely is a base amount of cash on hand in the several-hundred-million-dollar range, to make sure that we can continue to make and market the highest-quality products.

Without regard to the fact that now and then things don't go our way.

We're very fortunate that we have been profitable a lot lately, and we have been able to be profitable in multiple years without a frontline release of Grand Theft Auto.

That was our stated strategy.

And, of course, when we do have a frontline release of Grand Theft Auto, we have been very fortunate with those results, as well.

So it has been a lot of good news around here.

But not everything always goes our way.

We have had disappointing releases.

And we are a pure-play entertainment company, and there is an element of volatility baked into that.

And the ability to play another day; the ability to bet on your releases; the ability to spend a good deal of money in development and marketing is highly correlated with success in entertainment, which is why across all entertainment content businesses -- and I have been involved with all of them over the course of my career -- the rich get richer if they can keep delivering.

Now, I am fond of saying -- you have heard me say it before -- arrogance is the enemy of continued success.

We don't take anything for granted.

We don't claim our continued success as a matter of right.

Our team -- honestly, when I talk to our creative folks about how wonderful the Metacritic rating was or how great something went, inevitably what they explain to me is not how great they are.

But first, they tell me that it was the team's responsibility, not theirs; they disclaim responsibility, because that is our culture.

And then the second thing they do is point out the things that didn't go as well as they wanted in the area that we need to improve in.

And it is that culture that I think protects us.

But even so, now and then we get things wrong, and we need to be protected so our team can always feel safe in investing behind their passions and can feel safe in marketing our products in the highest-class way possible.

In terms of capital in excess of that amount, and I think we agree we have that now, but we do have some converts out there.

It's nice to have some flexibility in terms of redemption, even though we account for them as though they will be redeemed in equity.

And we have purchased $277 million of stock.

And no, we have no new announcements on that since those purchases.

And we have made no bones about the fact that we would be very interested in highly accretive M&A.

And let me emphasize highly accretive.

And by that I do not mean speculatively so; I mean actually so.

So we will continue to grow organically in a disciplined way.

Given that we are in a high-risk business, we are very focused on risk mitigation.

We are focused on, in a measured way, looking for strategic opportunities to grow inorganically.

And we absolutely have our eyes wide open about returning more capital to the shareholders.

And then just one quick follow-up question.

When you look at a successful title, or any of your titles, and the DLC that you have launched above and beyond that, I wondered if you could just give a range of the incremental upside that you get from a franchise above and beyond the physical release -- on average, what that looks like.

It is a general focus.

We haven't given out more color, because the numbers are all over the place.

As you would imagine, and it sounds obvious, but it's worth mentioning -- the more successful the original release, the more successful the downloadable content, the more important recurrent consumer spending becomes for the title.

Mike Olson, Piper Jaffray.

I just had one quick one here on Evolve.

You provided some details on the game, but can you maybe give us an idea if this is really going to be kind of the one big nonrecurring title that you plan to launch in 2014?

I'm sorry, what do you mean by nonrecurring title?

As in, like, NBA 2K is an annual title.

Oh, I see.

Yes.

Well, like we said before, we have announced that we have got unannounced titles in development at this point.

We haven't given any other disclosures.

But that -- obviously, that is one large one that we have announced for the year.

But other than that, we have got nothing more to say.

Daniel Ernst, Hudson Square Research.

Two questions, if I might.

One, if you look across the cycle that is pretty much just done, although GTA is keeping the current cycle going for those gamers: what percentage of your revenues over the course of the last cycle came from GTA?

And given -- compared to the last cycle, where you didn't have a BioShock, a Borderlands, and didn't have as successful a Red Dead, can you give us a scale of how that distribution changed cycle to cycle and where it might go in the new one?

And then, secondly, Strauss, relative to your comments on making accretive M&A: if you look over the last four or five years, there has been a lot of M&A in video game land.

And I think most people would agree that not a lot of it has been accretive, at least not for a very long.

As you look at opportunities, and given your experience in broader media, would a deal have to be in video games itself?

Or might you look to broaden the scope of what Take-Two does in terms of the mediums it serves?

We don't have the numbers in front of us in comparing this launch and our other titles to the last-launch GTA IV and other titles.

It would be very hard to do that apples-to-apples, because obviously it's not as though we have all of the release schedules of all of the titles in lockstep.

We do have a lot more big franchises today than we had when we launched GTA IV.

And we're very grateful for that, because as I said, we have launched at least one new intellectual property that sold millions of units every year since 2007, I believe.

So I think you can safely assume that the percentage is lower now than it was before.

But beyond that, I don't think we can give much color.

In terms of M&A, look, you are 100% right.

The track record of the industry is not wonderful.

Although Activision has done some very clever transactions, I would argue; and their stock price reflects that.

But across the board it hasn't been a pretty story.

We just don't believe in pie-in-the-sky.

We barely believe pie right in front of us, unless we are eating it.

So I think the answer is: strategy really matters; execution may matter more than strategy.

And would we contemplate other forms of digital entertainment in addition to pure video game entertainment?

We would contemplate that.

But beyond that we don't have much else to say now, and certainly nothing to announce.

Colin Sebastian, Robert W. Baird and Company.

Congratulations on the quarter.

First off, if you could provide any perspective on the efforts required to bring a franchise like GTA V over to other platforms -- if that is more or less a traditional port, or does Rockstar have somewhat higher standards that require something more in depth in terms of extensions?

And then on the digital strategy, I know as a content company you have to decide how much infrastructure and servers and networking to build yourselves versus relying on others -- in your case, like Sony and Microsoft.

So my question is: looking ahead, based on your experiences to date, do your platform partners have those pieces to serve your content as you'd like to your customers?

Or do you foresee any need to build any additional infrastructure to support your particular online initiatives?

We are going to leave it to our labels to talk about what happens with their properties going forward.

We think that's -- I know at times on these calls people would like me to talk much more about upcoming releases, and sometimes there is some frustration that we don't.

The truth is, though, we're trying to provide as much transparency as we can to our shareholders and leave the marketing decisions and the marketing announcements to our labels, because that is the way we maximize our sales.

So once again, Rockstar will make appropriate announcements about the releases as they come, as will 2K.

And as they make those announcements, then of course we will reference them here.

But let me emphasize that we feel very optimistic about our outlook going forward and very encouraged by the results we've had to date.

In terms of infrastructure, look, the world is going to -- resources are outsourced; and cloud computing, that is hardly a secret.

And we have zero interest in building up massive facilities and expending a great deal of money on CapEx.

I don't expect that we will see very significant CapEx investment.

I think the bulk of our need will be handled by third parties, whether that is our hardware partners or other third-parties that help provide capacity to have us meet consumers where they are.

But no, we are not building the call centers, data centers, or server fronts.

Ben Schachter, Macquarie.

The first one for Lainie.

Lainie, cash and accounts receivable of about $1.2 billion; accrued expenses are about $600 million, and actually most of that are the internal royalties.

What does that look like by the end of the fiscal year?

I'm basically just trying to get a sense of really what the net cash looked like.

And then if you could talk about -- are you going to be cash-flow positive for 2015?

And then, either Strauss or Karl, in general, do you expect any meaningful change in the overall business model with Microsoft or Sony this gen?

Or will the business model basically look like last gen?

Thanks.

For the cash flow for the remainder of this year, we see that it will be cash-flow neutral.

We are not giving out guidance for 2015 yet.

So we're not giving out cash flow expectation for that period, either.

And the overall, the balance sheet -- also, we don't give out projections on the balance sheet.

But it should be in line with how the P&L flows for the next quarter.

And Ben, it is Karl.

First of all, we're thrilled with the launch of the next-gen consoles.

We are very, very excited about how things are going right now, as I know Microsoft and Sony are.

In terms of changes in business models between us, I don't anticipate anything meaningful at all.

If I could just follow up with one, maybe Strauss -- assuming that Google, Amazon, and Apple continue to press forward with their digital media initiatives, and very likely that they will have their own boxes as they get more content to television screens, how does that impact how you think about the business?

It is all good news, because more distribution to consumers on a multiplicity of devices is a good thing.

And we have reason to believe that it is going to be easier and easier to develop in a way that we can be readily available without too much porting expense across a multiplicity of platforms.

If it costs money to port, and of course it does, then we have to make an economic decision based on who we think we're going to find at the other end.

And that is a balancing act.

We have invested heavily behind both Microsoft and Sony.

It looks like, as Karl said, that is going to pay off and is beginning to pay off.

We're thrilled about that.

But our goal is to be where the consumer is and to be utterly ecumenical about other people's platforms, as long as the economic model is reasonable.

So I think the answer is we intend to be everywhere.

Good luck.

Drew Crum, Stifel Nicolaus.

I noticed that Evolve has not been announced for old-gen systems.

And I think in your prepared remarks you noted the NBA 2K and WWE 2K would be available on new gen.

Is that any indication as to your plans to support old gen going forward?

And then the second question pertains to GTA V. There has been a lot of scuttlebutt or speculation that it will be available on PC shortly.

I'm not asking for a forecast on that, but can you give us some context -- history with GTA prior titles on the PC?

It is Karl.

In terms of the old gen versus new gen question, I would say that any of our announcements that we have made to date don't necessarily reflect our plans whether something is going to be specifically for next gen or old gen.

It is really more a function of what we've announced -- what platforms we have announced that they are going to be on at this point.

So we haven't said anything about Evolve but for next-gen platforms.

We haven't said anything about our NBA titles but for next-gen platforms, or our sports titles but for next-gen platforms.

But that doesn't necessarily mean that we're not going on current gen or that we are going on current gen.

It is not related at this point.

It just means we haven't had anything to share.

In terms of GTA V, either -- I think you asked about PC?

Correct.

Yes.

At this point there is really nothing for us to say about that.

We haven't announced anything as it relates to any other platforms versus what is out there.

I'm just trying to get a sense as to how it has performed on PC with prior iterations.

Again, not asking for a release date --.

Are you talking about GTA IV?

Correct.

Well, it has been a very strong PC title.

Neil Doshi, CRT Capital Group.

56% of your revenue came from international this quarter.

I think it is the highest we have seen in years.

Can you provide any color as to what drove that strong international sales?

And how material was NBA 2K China?

And then on GTA Online, any thoughts on eventually making that a mobile opportunity, just in order to keep people engaged in the franchise when they are away from their consoles or big screens?

Yes.

The average selling price translated into US dollars is higher outside of the US than inside the US.

So we certainly benefit from that.

We also benefit from our strategy to make sure that our international distribution is very strong worldwide.

Years ago we made a big push into Asia, with our headquarters in Singapore.

And we are reaping the benefits of that.

And obviously, with the sales of GTA V, we are seeing a benefit internationally.

We also have seen a lot of growth in Latin America, and we're pleased with that.

So we continue to focus on building our international business.

And these results are very gratifying.

In terms of mobile opportunities: again, we don't really distinguish between mobile and fixed.

We don't distinguish between tablet and PC.

We don't distinguish between console and PC and tablet.

We do distinguish between screen size -- small, medium, and large -- because they accommodate different experiences.

And we have our own limitations based on a platform's technical ability to serve our needs and consumers' needs.

But beyond that, we are utterly ecumenical.

And with regard specifically to GTA, and I have said it before: we're not talking about other releases yet.

We are going to leave it to Rockstar to have those discussions.

Mike Hickey, Benchmark Company.

Congrats on another great quarter.

Just curious -- on mobile, Strauss, it feels like there's a lot of value creation opportunity there for you.

I know you have experimented with premium, I think successfully; but it feels like free to play is the answer here.

And you're definitely seeing some games achieve some tremendous success in the market, and I think more to come.

It also seems like you're big bull there.

So just thinking about your IP cash, the development talent that you have and maybe that you acquire, it seems like a no-brainer here to be more aggressive on the mobile side.

So just hopefully you can share with us your strategic vision on how you are seeing mobile and how impactful it can be for you in the future.

Well, I don't want to confuse mobile with the free-to-play model because you could have -- in China you have a free-to-play model on PCs, obviously, which are largely wired.

Certainly free-to-play is a relatively common model for iPad and smartphone, but there is also a pay-to-play model on iPad and smartphone.

So I don't think mobile is the difference that makes a difference.

I think the business model shifts depending on the geography, depending on the title, depending on what a consumer wants.

So we sold GTA V as a package good.

We sold it as a digitally downloadable title.

We have made GTA Online available free-to-play, and there is an opportunity to spend money inside the game.

For NBA 2K China Online, it is free to play, and there is opportunity to spend money within the game.

So our business model reflects the title, the geography, and what consumers want.

Whether it is mobile or wired is of no consequence.

Mobile appears to be a hypergrowth market.

Is it something that you plan to put more resources towards?

I think part of the problem with your valuation is that in a lot of people's minds, you are still stuck to the console.

And I think for the most part, the majority of performance is console driven.

But you look at the trends that are shaping our future -- mobile is a big part of them.

So do you expect to put more resources there?

Is this something that you look for in M&A?

Any other thoughts would be appreciated.

Again, I think I view mobile differently than you do, Mike, because the content isn't mobile.

The content can be anywhere.

The question is, how heavy is it?

What kind of processing power is required for the graphics and the game play?

And right now we don't have the ability to take a game that we put on what is now current-gen consoles and put it onto an iPad, because an iPad doesn't have the processing power to allow that.

But I am a believer that it well.

And when it does, I have every reason to believe that we will support that with current releases, because that is the history of what we have done.

Right now we're putting out some of our older titles on iPad and other form -- other tablets because they support the titles.

And we are able to delight consumers and make money as we do it.

I am a big bull on where mobile platforms are going.

And I think they are great entertainment platforms.

If they can support what we do creatively, then we will be there.

And if they can't, then we have to wait until they can.

If you are asking can we create experiences specifically for mobile, we have done that as well -- with limited success, frankly.

So if what you are saying is you think that we ought to be more attuned to companies that create lighter experience specifically for our current mobile platforms can do -- for example, Zynga just bought a company, NaturalMotion, that does that.

It would be what some people call new core experiences.

Then I have no quarrel with NaturalMotion or with the strategy.

But I think the answer is, from our point of view, is there an opportunity that makes sense to do that?

And does it fit with our DNA?

And I know so far, the stuff that we have -- the bespoke stuff that we have done for these lighter platforms has enjoyed limited success.

Fair enough, thanks.

Last question, if I can.

It is kind of the perception, at least my perception, that as you have these next-gen early adopters -- and obviously it has been a big success here initially out of the gate -- that maybe they are leaving the online play experience in GTA as they upgrade the console experience.

And maybe the impact is not as significant right now because there's really a lack of quality content.

But are you seeing -- and I know you are hesitant to share engagement, but is that reasonable, to expect that as people upgrade that, they are not playing on prior-gen machines?

Look, we were selling PS2 products until very recently.

If you have great-quality titles, it's remarkable how long people will continue to consume them.

I know some of our competitors have expressed that they have seen a big falloff in what is now old-gen catalog.

But we have made it plain that we haven't seen such a falloff, and that is reflected in our very strong third-quarter results, where our catalog performed, as well.

So I think you're right.

As these new platforms gain momentum -- we hope they will -- software is made available for them, a lot of consumers will turn their attention to that.

And that is why we have more 10 titles in development for these new platforms, and why we are so very enthusiastic and optimistic about our future.

Equally, we remain very enthusiastic about our catalog, which continues to sell more units per SKU than anyone else's catalog over time.

Why is that?

Because we have the highest quality in the business, according to Metacritic, for the past five years.

And we don't rest on our laurels.

We know that is the past five years.

We have got to do it every day.

And we take that mission very seriously, indeed.

Thanks, guys.

Best of luck.

Edward Williams, BMO Capital Markets.

A couple of -- first of all, some quick questions.

Lainie, can you just clarify that the rise that we saw in the accrued expenses -- is that related to internal royalties, or is it something else that is driving that increase?

I can't confirm the exact details of the account, but it was to do with certain items for compensation, for our incentive compensation plans, as well as other items that would have been driven from the top line of the quarter.

And then how much of your cash is onshore?

60% is in the US and 40% is international.

And then the last one of these questions is: looking at headcount at quarter end, where was that number?

We had a total of 2,500 employees at the end of the quarter, and approximately 1,800 were development employees.

Okay.

And then, Strauss, just to look at your perspective that you should be maintain profitability in fiscal year 2015 and beyond, can you comment a little bit about what is driving that view?

Is it your knowledge about cost control in that time period?

Is it your visibility around revenue?

What is driving that comfort level at this point?

Well, as you would imagine, it is our pipeline in development; our anticipated release schedule; the costs related to development; the costs related to marketing; and the expectations of performance within a range.

And, of course, there is a degree of additional cushion provided by our views as to our catalog and for current consumer spending related to releases that are already in the marketplace.

And then your thoughts about the transition that we're seeing right now?

Obviously, you have commented that you are pretty enthusiastic about the adoption rate of the new consoles, but what is your perspective about the health of the retailers and kind of the retailer inventory levels?

We haven't had any issues with our retailers at all.

They remain our most important channel partner.

There were some issues in the UK some time ago, but it has been a relatively robust and quiet marketplace.

Brian Fitzgerald, Jefferies.

Following on the same line of questioning on the next-gen consoles, can you give us a sense of the percentage of users that are downloading full games versus buying at retail?

And then current gen versus next gen, are you seeing any behavioral differences in terms of engagement, or TIE issues, or willingness to download DLC, et cetera?

Brian, it is too early for us to have a view on that.

Because, remember, it's a relatively small population of what is now this new generation of consoles out there.

And we wouldn't seek to make those comparisons yet.

But in any case, we don't run our business based on that data.

It doesn't tell us anything.

We could know a TIE ratio, but it doesn't change our behavior.

Okay.

And then really quickly, it's going to be early, too, but any early impact or signals you are seeing from demand in China from the console standpoint?

Way too early to say.

There are no consoles launched there.

Doug Creutz, Cowen and Company.

It's a pretty quick one.

You mentioned you have a lot of store-based GTA V content in development.

Can you just say whether your March quarter guidance contemplates any of that being released in the March quarter?

Thank you.

We haven't given any color on that.

Larry Haverty, GAMCO Investors.

Strauss, it seems to me the market -- looking at the way the stock is acting, the market is penalizing you for these converts, and they are kind of extraordinary instruments.

Could you walk through when they are able to be converted, and the conversion price at this point?

And then I have a follow-up on that.

The first convert that we have in the market is the $250 million one; matures in December 2016.

And the second one, $287 million, matures in July of 2018.

And what are the coupons on those right now?

Well, the strike price on the first one is $19.09, and the strike on the second one is $21.52.

So you have the ability right now, if you were to -- I am not sure where these things are trading -- take away almost 30% of the common shares for basically half of the cash.

And that would seem to me to be an extraordinarily good trade, because the way the accounting is, it's very hard for someone to economically figure out whether the share count is 84 million or 125 million.

It is a huge gap between actual shares outstanding in the quarter and the potential dilution using the if-converted method.

And I think it is wreaking havoc on the way investors are valuing your stock.

And the idea of it -- these converts have an economic purpose, given the cash position.

And an efficient capital allocation I think is a bit presumptuous.

Could you discuss these issues?

There are obviously limitations on our ability to redeem before a certain period of time.

It is built into the indenture, as you know, Larry.

But we do back out the number of shares.

I think Lainie quoted 26 million of shares tied to it.

So you can easily back that out of the weighted average shares.

And you also -- you had asked, sorry.

The coupon on them is 1.75% on the first one and 1% on the second one.

They were highly efficient capital instruments when we launched them.

And I greatly respect your view of the market and how the market sees the converts.

I think they still represent a very positive source of capital to the Company.

But in any case, they are rather low-coupon instruments with rather high, in the case of the second one, strike prices compared to the current market price, in the case of the second one.

And of course, when we launched the first convert, it was significantly higher than the stock price at the time.

But in any case, there are limitations on how we go about redeeming them that we must observe.

Buy them in the open market though, right?

I suppose we have the ability to.

That is a way that we could return cash to shareholders.

Okay, great.

Thanks.

Thank you.

I would now like to turn the conference back over to Strauss Zelnick for any closing comments.

I just want to thank you all for joining us today.

We are exceedingly pleased with our results.

And I am immensely grateful to our shareholders; and, of course, I am primarily grateful to all of our colleagues all over the world who, once again, have hit it out of the park.

Thank you very much.

Thank you.

Ladies and gentlemen, this concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.