Take-Two Interactive Software Inc (TTWO) 2014 Q4 法說會逐字稿

Greetings and welcome to the Take-Two Interactive Software FY14 earnings call.

(Operator Instructions)

As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Hank Diamond, Senior Vice President of Investor Relations, thank you.

Good afternoon.

Welcome and thank you for joining Take-Two's conference call to discuss its results for the fourth quarter and FY14 ended March 31, 2014.

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 December 31, 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.TakeTwogames.com.

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

Thanks, Hank.

Good afternoon and thanks for joining us today.

FY14 was a record breaking year for Take-Two.

Rockstar Games Grand Theft Auto V reached $1 billion in sales, faster than any entertainment release in history, NBA 2K14 enjoyed the franchise's strongest launch, Borderlands 2 became 2K's top selling title, and our digitally delivered revenue grew to its highest level ever.

As a result of these achievements we generated record revenue, earnings, and cash flow for our shareholders.

We ended the year with nearly $1 billion in cash after spending $277 million to repurchase our stock at a meaningful discount to today's share price.

The highlight of our fiscal year was the worldwide launch of Grand Theft Auto V. This extraordinary title, which received more than 300 perfect scores, illustrates Rockstar Games unmatched ability to deliver creative excellence.

Grand Theft Auto V has been a commercial blockbuster that shattered numerous entertainment industry records.

To date the title has sold-in more than 33 million units worldwide and continues to attract new fans.

Rockstar Games is hard at work on their upcoming line up and we're excited about what they have in store for the new generation of systems in this fiscal year.

In sports, it's a monumental achievement to win a championship two years in a row.

2K and Visual Concepts have done just that for 13 consecutive years by consistently delivering the highest-rated and top-selling basketball video game.

NBA 2K14 was our first next generation title and already has surpassed NBA 2K13 as the top performing release in the franchise's history, with sell-in of more than 6.5 million units to date.

Moreover, the title has dominated next generation sports sales, surpassing both FIFA and Madden as the third-highest selling title of any genre on PS4 and Xbox One in the United States according to the MPD Group.

Borderlands 2, which launched in September 2012, continued to be a significant contributor to our results.

The title was the top-selling release in the history of 2K, with over 9 million units sold-in to date.

An important driver of Borderlands 2 success has been its superb array of add-on offerings.

During FY14, 2K released eight new downloadable content packs for the title, as well as the Game of the Year Edition.

The Borderlands franchise was launched less than five years ago and has quickly become one of the most beloved brands in interactive entertainment.

We look forward to expanding it with new offerings in the current year.

Our FY14 results also benefited from the successful launch of WWE 2K14 and continuing demand for Grand Theft Auto IV, BioShock Infinite, which has now sold-in over 6 million units and offerings for Sid Meier's Civilization V. The February release of Civilization V: The Complete Edition marked the final offering for this title, which has sold-in over 5 million units and was supported by two critically acclaimed expansion packs along with a selection of downloadable content.

The Civilization franchise will move forward this fall with the launch of Civilization: Beyond Earth.

Creating opportunities to drive ongoing engagement with our titles is a key strategic focus for our Company, and we've started to generate significant revenue and profits from our current consumer spending, including virtual currency, downloadable add-on content, and online gaming.

During FY14 recurrent consumer spending accounted for nearly 50% of our record $435 million in digitally delivered revenue, and approximately 75% of its growth.

Revenue from Grand Theft Auto online outperformed our expectations in the fourth quarter, and was the single largest contributor to our digitally delivered revenue in the fiscal year.

More than 70% of those who have played Grand Theft Auto V while connected to the internet played Grand Theft Auto Online.

Rockstar Games has supported this vibrant universe with additional content, including the Valentine's Day Massacre Special, the Business update, and today's release of the High Life update, and have much more to come.

Rockstar Games has also given players tools to create and publish their own in-game content.

As a result, players have created over 7 million pieces of content for Grand Theft Auto Online to date.

We look forward to the future of the ever-evolving world of Grand Theft Auto Online.

Online play by fans of our basketball franchise, including multiplayer gaming, grew significantly with the release of NBA 2K14, and was a key contributor to growth in recurrent consumer spending during the past fiscal year.

Sales of the games virtual currency increased more than 150% over NBA 2K13, as players continue to customize their experience and deepen their engagement with the NBA 2K brand.

Add-on content was also an important driver of growth in recurrent consumer spending.

In addition to Borderlands 2, we released successful downloadable offerings for BioShock Infinite, Sid Meier's Civilization V, and WWE 2K14.

We'll continue to support many of our new releases with immersive add-on content.

Finally, our online projects in Asia contributed to growth in recurrent consumer spending.

In particular, usage in player engagement with NBA 2K Online continued to gain momentum, and it's now the number-one PC online sports game in China with 19 million registered users.

Full game downloads across console, PC, and mobile platforms also helped to drive growth in digitally delivered revenue.

We're committed to providing our products on all relevant platforms regardless of the screen size.

During the past year we released multiple titles for tablets and smartphones, including core titles such as Grand Theft Auto: San Andreas; XCOM: Enemy Unknown; and NBA 2K14; along with a slate of offerings designed exclusively for these devices.

Over the past several years, Take-Two has been transformed from a Company that was dependent on one series into a financially-strong, global interactive entertainment enterprise, with numerous successful franchises encompassing a variety of genres.

Today, our Company is defined by its top creative talent, unwavering commitment to quality, and world-class marketing that turns product launches into pop culture events.

Our diverse portfolio of intellectual property includes 10 franchises with at least 1 5 million unit selling release, and more than 40 individual multi-million unit selling titles.

In addition, we've complemented our core release schedule with numerous successful offerings that drive recurrent consumer spending.

Looking ahead, we have more than 10 unique next generation titles in development including unannounced releases planned for FY15.

The successful evolution of Take-Two and its vast potential is reflected in our significant profit outlook for the current fiscal year, as well as our expectation for continued non-GAAP profitability every year for the foreseeable future.

I'll now turn the call over to Karl.

Thanks, Strauss.

Today I'll provide an update on our robust development pipeline for FY15.

On October 7, Visual Concepts will enhance their unparalleled basketball legacy with their launch of NBA 2K15 for PS3, PS4, Xbox 360, Xbox One, and PC.

Last week 2K announced that Oklahoma City Thunder Super Star four-time NBA Scoring Champion and recently crowned 2014 NBA Most Valuable Player, Kevin Durant, will make his solo debut as the game's cover athlete.

We're thrilled to have him aligned with our brand, which underscores 2K's commitment to continually strengthen the franchise through the integration of the NBA's best athletes.

2K has kicked off the pre-order campaign and we're confident that NBA 2K15 will once again set new benchmarks for sports realism and gameplay.

Wrestling fans can look forward to a new annual release from our WWE 2K franchise, which promises to take the series to new heights.

This will be our first next generation WWE 2K title, and also the first in the series to leverage the development expertise of Visual Concepts, which has made NBA 2K a perennial favorite and one of our most successful franchises.

This Fall, 2K will launch Evolve for Xbox One, PS4, and PC.

Developed by Turtle Rock Studios, the creators of the cooperative shooter classic Left 4 Dead, Evolve is a new intellectual property that blends first person and third person shooter action with cooperative and competitive multiplay, resulting in a fast pace and deeply fun entertainment experience.

Set on a frontier planet on the edge of the galaxy, players will have the opportunity to be one of four hunters each with their own special abilities who will work together to fight a powerful, constantly evolving player-controlled monster in a unique four-versus-one gameplay experience.

The media's response to Evolve has been very positive, with GameSpot declaring, "Evolve is one of the most unique ideas we've seen in awhile, and a well-executed one at that.

Definitely one to watch." And Entertainment Weekly writing, "Evolve feels like a real evolution of the co-op shooter genre."

Also this Fall, Borderlands The Presequel will be available for Xbox 360, PS3, and PC.

For the first time in the series Borderlands the Presequel transports players to Pandora's moon, where they will experience intense gravity-bending gun fights using an array of all new weapons and loot.

Co-developed by Gearbox Software and 2K Australia, the title takes place in between the stories of the original Borderlands and Borderlands 2 as players take control of handsome Jack's four lieutenants and experience the fan-favorite villains' rise to power.

Borderlands The Presequel will continue the franchise's tradition of innovative cooperative multi-player action allowing players to drop in and dropout of the game online or to play it together via split screen.

The Borderlands universe has become one of our Company's most popular series, and we're thrilled to provide its passionate and dedicated fans with even more ways to experience its incredible gameplay.

Firaxis Games will also send players into space this fall with the launch of Sid Meier's Civilization: Beyond Earth for PC, a new science fiction themed entry into the award winning franchise that has entertained audiences for nearly a quarter of a century and sold-in more than 24 million units worldwide.

Beyond Earth features the core and tactical elements for which the series is famous, while propelling players beyond the traditional timeline of a Civilization game by exploring humanity's future on an alien world.

For the first time, players will lead factions divided by contrasting cultures and evolve their new civilizations to reflect their chosen destiny.

Players will experience an array of new gameplay possibilities in an alien world that will change the very identity of each faction based on the choices they make.

I'm pleased to share that Beyond Earth will be featured on the cover of the July issue of PC Gamer Magazine, which will include an in-depth preview of the title.

Evolve, Borderlands The Presequel, and Sid Meier's Civilization: Beyond Earth were featured last month at PAX East in Boston.

This annual event provides consumers with the opportunity to meet some of our creative talent and get hands-on time with our new titles.

The response was fantastic, with thousands of fans coming to 2K's booth each day, many standing in line for over three hours just to see our games.

IGN's readers voted 2K as having the best booth of the show and Entertainment Weekly, Game Informer, and Kotaku each listed our titles among their favorites at PAX.

2K experienced similar fervor at previous PAX shows for titles such as Borderlands 2, BioShock Infinite, and XCOM: Enemy Unknown, which helped set the stage for their successful launches.

Next month, 2K will have a large presence at E3 featuring many of their upcoming releases.

We encourage you to stop by our booth and see how we'll build on our trend of delivering the most groundbreaking offerings in our industry.

Rockstar Games will continue to support both Grand Theft Auto V and Grand Theft Auto Online with new content updates, including the upcoming launch of cooperative heist missions, which will allow players to work together in new ways for substantial rewards.

In addition, Rockstar Games plans to release more updates throughout the spring, holiday themed event updates, and story mode content.

We'll have more to share about our unannounced FY15 releases in the coming months.

FY15 is poised to be another strong year for our Organization, highlighted by a diverse array of the highest-quality new releases and innovative offerings that drive incremental profits from recurrent consumer spending.

Our positive outlook expands well beyond this fiscal year as we enter an exciting new chapter for Take-Two.

In closing, I'd like to join Strauss in thanking all of our colleagues around the world for delivering a record year and for their dedication to our continued success.

I'll now turn the call over to Lainie.

Thanks, Karl.

Good afternoon everyone.

Today I'll review our results for the fourth quarter and FY14 and then discuss our outlook for the first quarter and FY15.

All of the numbers I'll be providing today are non-GAAP results and 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 fourth quarter, net revenue decreased 23% to $233.2 million as last year's fourth quarter benefited from the release of BioShock Infinite and we had no significant releases during this year's fourth quarter.

This exceeded our outlook range of $170 million to $200 million, due primarily to the continued strong performance of the Grand Theft Auto series.

Digitally-delivered revenue grew 51% and accounted for $122.3 million of net revenue.

The largest contributors to digital sales were the Grand Theft Auto series, the NBA 2K franchise, and offerings for Borderlands 2. Approximately 60% was derived from recurrent consumer spending.

Catalog sales accounted for $75.7 million of net revenue, led by Borderlands 2, BioShock Infinite, the Grand Theft Auto series, and Civilization V. Gross margin decreased 1.9 percentage points to 47.7%, due primarily to higher internal royalties.

Operating expenses were $88.4 million, down by $16.7 million due primarily to lower marketing expense.

Interest and other expense was $2.2 million.

And non-GAAP net income was $21.5 million or $0.21 per share, as compared to $42.9 million or $0.38 per share in fiscal fourth quarter 2013.

This result exceeded our outlook range of breakeven to $0.10 per share.

On a GAAP basis we reported revenue of $195.2 million, and loss from continuing operations of $30.8 million or $0.40 per share.

Turning now to our results for the full year.

Net revenue increased 97% to a record $2.4 billion.

This growth was driven primarily by the extraordinary success of Grand Theft Auto V. Revenue from digitally delivered content grew 65% and accounted for $435.1 million of net revenue.

The largest contributor to digital sales were offerings of the Grand Theft Auto series, Borderlands 2, the NBA 2K franchise, Civilization V, and BioShock Infinite.

Nearly 50% was derived from recurrent consumer spending.

Gross margin decreased 0.7 percentage points to 41.5% due primarily to higher internal royalties.

Operating expenses were $468.5 million, up by $1.7 million due to higher personnel expenses in our development studios, higher professional fees and IT expenses, and higher research and development costs, which are offset by lower selling and marketing expense and the absence of the $15 million one-time contractual obligation recognized in FY13.

Interest and other expense was $10.8 million.

And non-GAAP net income was $510.7 million or $4.26 per share, as compared to $33.1 million or $0.36 per share in FY13.

On a GAAP basis we reported revenues of $2.4 billion and income from continuing operations of $361.7 million or $3.20 per share.

Turning to some key items from our balance sheet.

At March 31, 2014 as compared to December 31, 2013, our cash balance decreased to $935.4 million.

Our accounts receivable balance decreased to $53.1 million, primarily reflecting the collection of receivables associated with our third-quarter releases and holiday sales.

Inventory decreased to $29.8 million, due primarily to shipments for replenishment orders of Grand Theft Auto V. And software development costs and licenses increased to $225.7 million, reflecting the development efforts around our pipeline of upcoming releases.

Now I will review our financial outlook for the first quarter and FY15, which is provided on a non-GAAP basis.

Starting with the full year, our initial outlook is for non-GAAP net revenue to range from $1.35 billion to $1.45 billion, and non-GAAP net income to range from $0.80 per share to $1.05 per share.

Turning to the details of our full-year outlook.

The majority of our revenue is expected to come from our slate of announced new titles including NBA 2K15, Evolve, WWE 2K15, Borderlands The Presequel, and Civilization: Beyond Earth, new releases that we have not yet announced, and catalog sales led by the Grand Theft Auto series.

We expect the revenue break down from owned labels to be roughly 45% from Rockstar Games and 55% from 2K.

We expect our geographic revenue split to be about 55% United States, and 45% international.

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

Total operating expenses are expected to increase by approximately 14%, driven primarily by higher selling and marketing expense to support our FY15 release schedule.

Selling and marketing expense is expected to be about 20% of net revenues, based on the mid point of our outlook range.

And we project interest and other expense of approximately $9 million, tax expense is about $32 million, and weighted average fully diluted shares of approximately 118 million.

This reflects weighted average basic shares of approximately 81 million, 11 million participating shares to 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.

As a result of working capital needs, we currently expect our operations to use a modest amount of cash in FY15; however we expect to generate cash from operations in FY16 and to be net cash flow positive over these two fiscal years.

Turning to the first quarter, we expect non-GAAP net revenue to range from $120 million to $135 million and non-GAAP net loss to range from $0.25 to $0.35 per share.

The majority of our revenue in the first quarter is expected to come from NBA 2K14, the Grand Theft Auto series, and Borderlands 2. We expect first-quarter gross margins in the high 50%s.

Total operating expenses are expected to increase by approximately 4% from the prior year's first quarter, primarily due to additional staffing at our studios to support our release schedule.

Selling and marketing expense is expected to be about 30% of net revenue based on the mid point of our outlook range.

Our first-quarter outlook also reflects interest and other expense of approximately $2 million, no tax expense, and weighted average shares of approximately 79 million.

In closing, Take-Two's record results for FY14 were due to our global Organization's ability to deliver the highest-quality interactive entertainment within a disciplined fiscal framework.

We have entered the current year with the strongest financial foundation in the history of our Company.

As a result, Take-Two is well positioned to pursue its numerous creative endeavors, while also continuing to generate positive results to shareholders for FY15 and over the long term.

Thank you, now I'll turn the call back to Strauss.

Thank, Karl and Lainie.

On behalf of our entire Management team, I'd like to thank our colleagues for delivering a record year and setting the foundation for our consistent long-term success.

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

We'll now take your questions.

Operator?

Thank you.

(Operator Instructions)

Our first question comes from Eric Handler with MKM Partners.

Yes, thanks for taking my questions.

Two things.

First, when you look at your cash on hand, you're now sitting at about over $8 of cash, and I think investors were pleased that you guys returned some of the capital this year through your buybacks in the third quarter, but fourth quarter there was no buybacks.

And given all the cash that you're sitting on and understanding that you're not expecting to generate any positive free cash flow in FY15, is there anything in particular that you feel a need to just sit on that level of cash right now?

Thanks, Eric for your question.

We've said before about the cash balance and this is a high-class problem to have.

Is it there are at least three potential uses: one is to support our organic growth and our history of organic growth around here is pretty grave, actually, if you just look over the course of a few years; the bulk of the growth indeed has been organic.

And [in turn] for instance, our Asia initiatives, we turned partnerships to make sure that we could both mitigate the risk and fund those growth opportunities at a time when we were capital constrained.

Thankfully those constraints are lifted, those opportunities have largely turned out to be very beneficial, and now we are in a position to finance more organic growth internally.

Secondly, there's the opportunity for inorganic growth driven by acquisitions.

We've been really selective about acquisitions and I don't expect that our discipline will be in any way reduced.

Historically, when we've acquired something it's the intersection of a high-quality team with high-quality owned intellectual property, and that is the lens through which we tend to look at the world.

We're not interested in pie in the sky deals.

We are only interested in accretive deals.

But again, our balance sheet now gives us the opportunity to look at those deals in a more fulsome way.

And finally, in the last year, we had demonstrated a desire to return cash to the shareholders by buying back $277 million of our stock; we do have an open authorization still for share repurchase and we'll contemplate that as well.

So there are any number of options in front of us and that's the palette from which we can choose.

It's a nice position to be in.

Okay.

And then just as a follow-up more for Lainie.

Your G&A in the fourth quarter was $51 million and that seems to be a line item that fluctuates quite a bit quarter to quarter.

How should we think about that line as we sort of progress through FY15?

G&A usually stays pretty flat from quarter to quarter and that'll probably be in line with last years balance.

The way to look at it though, is it can depend on if there's a one-time write-off or something in last year; in 2013 we had a one-time $15 million contractual obligation that we had written off during that period.

But otherwise it should be pretty flat to last year's number.

Okay, thank you.

Thank you.

Our next question comes from Justin Post with Merrill Lynch.

Please proceed.

Thank you.

Obviously you have quite an installed base for Grand Theft Auto V and not a lot about your plans there, I'm sure Rockstar is part of that.

But what can you tell us about how digital is tracking versus your expectations?

And how that has factored into your guidance for next year?

And then bigger picture, next year 2015 it's expected to be a big year for the console cycle, so next calendar year.

How are Rockstar and Take-Two approaching what could be finally a growth year for software sales next calendar year?

Thank you.

Yes, I mean I think when you talk about digital, I assume you mean recurrent consumer spending related to Grand Theft Auto Online, and we've said as that continues to be a very good story indeed and, if anything, has exceeded our expectations.

It's early days yet and there's a lot of great content out there, there's great engagement.

We're all anxious to see how that develops.

But by any standard, it's a very good story and Grand Theft Auto Online is a big generator of recurrent consumer spending for us.

And I'm glad you're optimistic about what next gen rollout looks like in the coming calendar year.

We tend to be highly optimistic as well.

We have more than 10 titles in development for next gen, we've had a great experience with our basketball title which was the number-one sports title for next gen and the number-three title overall for next gen from last fall.

So we've announced a number of titles, we said we have more titles to announce for this fiscal year and for the future, and the fact that the installed base looks sound and growing is potentially a benefit for us.

As far as Rockstar goes, we've confirmed that they're hard at work on their current line up, and we're very excited about what they have in store for next gen systems in this fiscal year.

Great, and maybe one follow-up.

Will Rockstar have a presence at E3 this year?

Hi Justin, it's Karl.

At this point Rockstar hasn't announced that they are going to be attending E3.

Thank you.

Our next question comes from Daniel Ernst with Hudson Square Research.

Yes, good evening.

Thanks for taking my call.

A couple questions if I might.

First, if you look at your line up for this coming year, you have a very balanced portfolio of titles coming out, which is a nice thing following a big blockbuster year with GTA.

Without giving guidance beyond that, is that kind of a balanced portfolio approach that you can have in subsequent years, where you don't have as big of swings in between the GTA, can you just give us a sense of how you're timing and allocating resources to have a more consistent earnings schedule?

And then as related question, if you look at your R&D budget including capitalized expenses, how much of that is dedicated towards new IP versus putting out new versions of previously successful IP?

Thanks.

Yes, thanks, Daniel.

Look, I think you've identified the way the year is penciling out and it's a reflection of our strategy.

Historically what we found when we came to the Company some years ago was a Company that was dominated by one franchise and operated within one business model.

Everyone knows what the franchise was and the business model was you create a game and put it in the box and you ship it, and then maybe you ship the budget edition or Game of The Year Edition, and perhaps you ship some expansion packs.

Well in the past seven years we've launched a multiplicity of new franchises.

The Company now has 10 franchises that have each sold at least 5 million units for an individual release.

And in terms of business model, we and frankly the rest of the industry have diversified so that we have revenue that comes after the initial release of the game that's not related just to the sale of a full game, whether that's digital or physical revenue, and we call that recurrent consumer spending.

What's exciting about the coming year and subsequent years is it's sort of both of those features that [were released] in the balanced portfolio of franchises year in year out, in addition to new intellectual property that we hope will become new franchises.

And we're aggressively pursuing this new business model, which means that we make a game available physically, we make it available digitally, we make downloadable content available when it makes sense, and when it makes sense we allow consumers to engage in the game both in terms of gameplay and in terms of spending money.

We call that recurrent consumer spending.

And that's become a very powerful engine here both creatively and economically.

Of course we start with the creative ending and then we move on to the economic engine, and Lainie can answer the question about the balance sheet.

So in the R&D that capitalized in the expense, we haven't shared before the breakdowns of new versus old IP, but both of our labels work on new IP and then old franchises all the time, so that's all included in that balance.

And Daniel, I will say, it's Karl talking.

We said this many times before that we have a very strong philosophy around how you just can't come out and just re-release franchises over and over and over again.

It's very important to us to constantly be reinvesting in new IP, and that is a stated objective of our Company.

We don't feel comfortable just sitting on our accomplishments and not trying to push the bar forward not only with them, with those franchises, but obviously coming out with new franchises as well.

You've got to keep the pipeline going and that's the only way to do it.

Great, that's great color.

And if I could just have one other question.

If you look at your planned split for domestic versus international, 55/45, a lot of media companies kind of flip flopped from that.

What are the prospects of moving towards having a bigger presence overseas than you do domestically?

We've already moved that number meaningfully in the past few years, and remember that includes our sports revenue which does tend to skew for us still towards the US.

We've made a big push internationally by aggressively focusing on Asia, we have headquartered in Singapore and offices over much of Asia.

And we mentioned the progress we've made with NBA 2k Online.

So that's just one reflection of the progress we've made in the market.

But international, we are a worldwide Company and international revenue should continue to increase.

Great, thank you.

Thank you.

Our next question comes from Arvind Bhatia with Sterne, Agee.

Thank you.

I'd like to say congratulations on putting up another solid quarter.

I was wondering if you might be able to give us some more color on digital that's baked into your FY15 guidance; should we be thinking in terms of the percentage, I think about 20% of your FY14 was digital, I think about 18%, 19%.

Is that the right way to think about it?

And then I know you had NBA 2K14 on the next gen.

Are you able to tell us what percent of your games on that game were full game downloads, what you're hearing maybe from other companies?

And then lastly, in the FY15 slate, the unannounced titles, can you talk to how dependent that is on AAA titles versus AA or more average-type titles?

Thank you.

Yes, in terms of percentage of revenue attributable to digital distribution, it's a work in progress.

There's no doubt in the year where we initially launched Grand Theft Auto V shipping 33 million units, that's a year that's going to skew the physical distribution.

So as revenues are lower one could imagine digital revenues being somewhat higher, but that remains to be seen and it depends on our release schedule and how our recurrent consumer spending develops.

But I wouldn't want you to extrapolate from this past fiscal year to the subsequent fiscal year.

In terms of a break out for NBA, full game downloads versus virtual currency, we haven't broken that out.

And in terms of our unannounced titles, it's tempting to be flippant and say everything we do is going to be a hit.

We know that, much as we'd love to say that, that isn't always the case.

But it is very much our goal, and we really only work on AAA titles, and our teams only work on titles they're passionate about, and they only work on titles they believe can and will be massive hits.

And we are right much more often than we're wrong and according to Metacritic, we have the highest Metacritic scores for the past six years including this past year, and that's a reflection of both that objective and the execution of the objective.

That doesn't guarantee that everything we'll do in the coming year will be a hit, but that's certainly our goal.

We don't have AA titles, we don't have A titles, we only work on AAA titles.

So it is more than one AAA title that's in the guidance?

Yes.

Okay, thank you guys.

Our next question comes from Drew Crum with Stifel Nicolaus.

Okay, thanks.

Good afternoon, everyone.

So I wonder if you could talk about the confidence in the FY16 positive cash flow guidance that you mentioned, Lainie.

And then separately, Strauss, could you talk about maybe it's better asked of the studios, but you got Evolve on new gen and Borderlands sequel on past gen.

What's the philosophy behind not making them available on both generations of systems?

Thanks.

Drew, our outlook for FY16 and going forward where we say that we plan to be profitable in the foreseeable future is based on a multi-year plan, which has ongoing profitability for the Company and then 2016 it also shows positive cash flow.

In addition, our development pipeline, which extends out further, gives us confidence in our ability to remain profitable over the long term.

Lainie, are there any other working capital items or one-time items that are influencing that guidance?

Well, when we look at 2015, we were growing our capitalized software balance to support our exciting pipeline of titles, and then we look at the timing of our new releases, which is why we're modestly going to be down in 2015.

And then so that cash will be collected in 2016, as well as the profitability ongoing in 2016 will affect the overall two-year cash flow.

Okay.

And drew, it's Karl.

In terms of Evolve and Borderlands for next gen, current gen, so for Evolve this is a title we're obviously extremely excited about.

We've gotten a lot of great press about it, and there's great buzz and there will be some more about it on E3, and hopefully you'll get a chance to check it out because it really is a fantastic title.

And the bottom line is the strategy there is it's a next-gen game built on a next gen engine and it's meant for next gen; to truly take advantage of what the game has to offer, and I think you'll understand more about that as you get to know the game better, I think you'll understand what we mean.

Because it really is something that we think is going to take the cooperative and competitive multiplayer to a new level, so it really fits best on next gen consoles.

In terms of Borderlands, really the opportunity there is you've got an enormous installed base and you've got a platform where there's a lot of folks out there, they're still hungry for content, there's not a lot of other content coming out that's exclusively for or specifically for current gen consoles, and we just saw a market opportunity and we think that our title fit very, very well in that regard.

Okay, thanks guys.

Our next question comes from Tim O'Shea with Jefferies.

Yes, hi thanks for taking my question.

Just today all the FY15 titles are coming out of 2K.

Just wondering the likelihood of seeing a Rockstar title in FY15?

I may have missed exactly how much full year revenue Lainie said to expect from Rockstar but I think it was 45%, thanks.

Yes, we basically said that Rockstar is hard at work on their line up, and there's news to come for this fiscal year and that we expect Rockstar to account for about 45% of the year's revenue.

Fair enough, thanks.

Our next question comes from Todd Mitchell with Brean Capital.

Hi this is Yung Kim for Todd.

Just quick question in regards to the balance sheet.

There were some step ups in both restricted cash and for accrued expenses.

Could you walk us through what drove those two?

The restricted cash balance of about $194 million is for a payment of certain software development royalties and those are included in our accrued expenses at the end of the year.

Great, thank you.

Our next question comes from Neil Doshi with CRT Capital.

Great, thanks guys.

Karl, just another question on Evolve.

It's going to face probably some tough competition this fall in the shooter category.

How should we think about the opportunity for this franchise?

And then maybe a question for Strauss.

Google and Apple are now trying to strike deals with developers for exclusivity.

How do you think this impacts the industry and impacts Take-Two's business?

Thank you.

Thanks, so in terms of Evolve you're right.

There are a lot of products coming out this fall and I think it's going to be a really great year for the entire industry.

And in general I think that's a really good thing because a lot of people will be in the stores and they'll be talking about games and they'll be buying a lot of games.

We happen to believe that Evolve is so different and unique that the game will stand on its own.

And in general, we understand that there is the notion of consumer wallet share out there, and people only have a certain amount of money that they're willing to spend on entertainment experiences.

But we really don't see ourselves as specifically competitive with any other company or any other game, and with the exception perhaps maybe in the sports business.

But in general we don't really fear the competition in that way, and we think that this game specifically will stand out in a crowd, and we actually like the fact there are a lot of games coming out because again it gets people in the stores and gets people buzzing about the industry.

And this is Strauss.

In terms of Google, Apple, and others perhaps seeking developer exclusivity, look, it remains to be seen.

Our stated strategy is to make our products widely available, whatever platforms consumers are using and we're flexible about the nature of the platform, the size of the screen, as well as the business model, so we're not rule-based in that way.

Generally speaking, we've looked for wider rather than narrower availability.

If for some reason the business evolved differently then we would evolve with it, but I doubt that it's going to become a business of platform exclusive; that would be costly and it's hard to imagine that would really benefit consumers.

And the analogy is pay television.

In the early days of pay television there was an awful lot of exclusive content and exclusive deals, and pretty quickly the pay television services determined that didn't make a whole lot of sense.

So I'm skeptical that that's how the business will develop, but if it does develop that way, we will take the opportunities as we find them.

There are no further questions.

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

Well, wanted to thank you first of all for joining us today and just take another moment to express gratitude to our entire team worldwide, many of whom are on the call today.

We've had an amazing time of development and growth and success, driven of course first and foremost by the incredible creative efforts of our teams at both Rockstar and 2K.

And we're immensely grateful to the folks who show up at work every day and try to think out of the box and do something that's never been done before.

And we're equally grateful to our marketing distribution and business teams who make sure that we get the very best out of those products as we market and distribute them around the world, and then as we run this business in a very high-class way.

And I think all those efforts are reflected in the results that you see.

It's a lot of work every day but it's work that we're passionate about and that we love.

And we very much appreciate all of our shareholders support and we endeavor to deliver another great year for you.

Thanks very much.

This concludes today's teleconference.

You may disconnect your lines at this time.

And thank you for your participation.