Take-Two Interactive Software Inc (TTWO) 2015 Q2 法說會逐字稿

Greetings and welcome to the Take-Two Interactive Software quarter 2 fiscal year 2015 earnings call.

At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

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

Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the second quarter of fiscal year 2015 ended September 30, 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, 2014, including the risks summarized in the section entitled Risk Factors, and in the Company's quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2014.

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 will turn the call over to Strauss.

Thanks Hank. Good afternoon and thank you for joining us today. I am pleased to report that, for the ninth consecutive quarter, Take-Two delivered better-than-expected results, which further illustrate our Company's continued positive momentum. Key drivers for the period were strong catalog sales led by Grand Theft Auto V, NBA 2K14, and Borderlands 2, and continued growth in digitally delivered revenue from our current consumer spending, particularly for Grand Theft Auto Online.

Grand Theft Auto V remains our Company's and industry's standard bearer for creative and commercial excellence. More than a year after its record-breaking launch, the title is still captivating new audiences on PlayStation 3 and Xbox 360, and we believe its enduring popularity will grow even stronger when the title makes its November 18 debut on PlayStation 4 and Xbox One.

NBA 2K14 and Borderlands 2 also continue to attract new fans and generate meaningful revenue from our current consumer spending long after their initial release dates. Their ongoing success underscores the durability of our key franchises and demonstrates that consumers remain engaged with our highest quality titles for prolonged periods of time, and then eagerly return on day one to experience each new iteration.

A diverse array of other titles also contributed to catalog sales during the quarter, including the Grand Theft Auto series, WWE 2K14, Sid Meier's Civilization V, Red Dead Redemption and BioShock Infinite. Our deep catalog of must-have titles is an important competitive advantage and provides a predictable contribution to our results.

During the second quarter, $89.8 million of our non-GAAP net revenue was digitally delivered. Importantly, nearly 60% of this revenue was derived from recurring consumer spending, which grew 45% year-over-year.

We continue to see strong consumer engagement with Grand Theft Auto Online, which has both exceeded our expectations and has been the single largest contributor to digitally delivered revenue in every quarter since its launch.

During the second quarter, Rockstar Games released two updates, including the San Andreas Flight School Update, and the Last Team Standing update. The ongoing release of new content for Grand Theft Auto Online keeps consumers immersed in the game's vast open world and we remain highly enthusiastic about its future, including the upcoming launches on PlayStation 4, Xbox One and PC.

Recurring consumer spending for NBA 2K also grew during the second quarter with revenues up approximately 135% year-over-year. We expect that online play and virtual currency will continue to be important contributors to the success of our industry-leading basketball franchise.

A variety of other offerings also contributed to recurrent consumer spending in the second quarter, including downloadable add-on content for Borderlands 2 and other titles, NBA 2K online in China, and in-game spending on the WWE SuperCard, which has been downloaded more than 3.5 million times and has quickly become 2K's most financially successful free to play mobile offering.

Continuing to create opportunities that drive ongoing engagement with our titles after release is a high-margin growth opportunity for our Company and a key strategic focus of our teams. We've only scratched the surface and we plan to support our future releases with innovative offerings designed to drive recurrent consumer spending.

Full game downloads across console, PC and mobile platforms also contributed to digitally delivered revenue. During the second quarter, we expanded our offerings for tablets and smartphones with the release of BioShock and Sid Meier's Civilization Revolution 2 for iOS. We are committed to providing our products on all relevant platforms regardless of the screen size and to all distribution channels, both physical and digitally delivered.

Our fiscal third quarter is off to an excellent start with one of the strongest and most diverse holiday lineups in the history of our Company. The initial response to our recent releases, including NBA 2K14, Borderlands: the Pre-Sequel, Sid Meier's Civilization Beyond Earth, and WWE 2K14, has been outstanding as Karl will discuss shortly. Through the tireless passion and dedication of our teams, we have been able to accomplish the challenging task of simultaneously delivering four AAA titles within a single month, supporting them with world-class marketing campaigns, and executing seamless global distribution. In doing so, 2K has further exemplified its impressive capacity for growing its business by delivering multiple high-quality products and building leading franchises. And there is more to come.

As a result of our better-than-expected second-quarter performance, strong current business trends and positive outlook, we have raised our revenue and earnings expectations for fiscal 2015, which is on pace to be one of our best years ever. Looking ahead to fiscal 2016 and beyond, we have a robust pipeline of yet to be announced titles in development, including both groundbreaking new intellectual properties and new releases from our established franchises, coupled with digitally delivered offerings designed to drive recurrent consumer spending. Our Company is better positioned than ever to continue delivering long-term growth, profits, and returns for our shareholders.

I will now turn the call over to Karl.

Thanks Strauss. Today, I'll provide an update on our recent releases and lineup for the remainder of fiscal 2015.

On October 7, 2K launched NBA 2K15 and further cemented the franchise's undeniable legacy as the number one basketball experience in our industry. Developed by visual concepts and available for prior gen, next gen and PC, NBA 2K15 has been lauded by consumer and media for once again raising the bar for sports realism in gameplay. This year's Xbox One and PlayStation 4 versions offer a variety of new features, including revolutionary 3-D facial scanning which enables players to put themselves into the game by living the life of a player in My Career, becoming the face of a franchise in my GM, or playing with friends online in multiplayer modes. Fans of NBA 2K15 also can engage with the game on their tablets and smartphones through the full-featured mobile version and the My NBA 2K15 companion app. NBA 2K15 has enjoyed the strongest launch in the history of the series with both record first week selling and sellthrough across all platforms, and currently is the highest rated sports game release this year on PlayStation 4 based on Metacritic.com rankings.

On October 14, 2K released Borderlands the Pre-Sequel for Xbox 360, PlayStation 3 and PC. The title is off to a strong start, demonstrating that there is still a vibrant market for must-have prior-gen titles. In keeping with the franchise's successfully tradition of successfully driving recurrent consumer spending, Borderlands the Pre-Sequel will be supported by four action-rich downloadable add-on packs which also can be purchased together via a season pass. Borderlands continues to be one of our Company's most popular franchises, and Borderlands the Pre-Sequel is another great offering for diehard fans and newcomers alike.

On October 23, 2K hit the ice with NHL 2K for iOS and Android. We are excited to provide hockey fans with a full-featured mobile gaming experience consistent with our strategy of exploring select opportunities for tablets and smartphones.

On October 24, 2K expanded their wildly successful Civilization franchise with the release of Sid Meier's Civilization Beyond Earth for PC. The title features the core and tactical elements for which the series is famous, while propelling players beyond the traditional timeline of the Civilization game by exploring humanity's future on an alien world. Civilization Beyond Earth is off to a great start and has garnered positive critical reception from influential press, with Game Informer awarding it a score of 9 out of 10 and declaring the title a worthy bearer of the Civilization name and a must play for strategy fans.

Yesterday, 2K released WWE 2K15 for Xbox 360 and PlayStation 3, and also will bring the title to Xbox One and PlayStation 4 on November 18. Developed collaboratively by visual concepts and use, WWE 2K15 offers major gameplay enhancements, improved commentary and a collection of the biggest roster of WWE superstars. For the first time in history of the series, WWE 2K15 includes My Career mode, a fan favorite from our NBA 2K series, which enables players to experience the life of a rookie WWE superstar and rise to the ranks to earn a title shot at WrestleMania. The title also will be supported with an exciting array of downloadable content, including a season pass. The initial launch of WWE 2K15 is off to an encouraging start, and we expect the combined launch on prior-gen and next-gen to show meaningful growth versus last year's release.

I'd like to congratulate 2K and their studios, Visual Concepts, 2K Australia and Firaxis Games, as well as our external partners at Gearbox Software and Mute, for delivering a stellar array of titles for this holiday season. Their commitment to excellence is evident within each release and we are very proud of their contributions to our organization.

Now I'd like to discuss our upcoming pipeline. On November 4, 2K will release BioShock Infinite, the Complete Edition, for Xbox 360 and PlayStation 3. Featuring the award-winning title and all of its previously released add-on content, the Complete Edition provides unprecedented value and is a must-have item for gamers who have yet to experience BioShock Infinite's graphically stunning world, deep and immersive storytelling, and heart-pounding action.

On November 18, Rockstar Games will launch their record shattering hit Grand Theft Auto V on PlayStation 4 and Xbox One with a PC version to follow on January 27, 2015. In addition to increased draw distances and higher resolution, players can expect a range of additions and improvements, including new weapons, vehicles and activities, additional wildlife, denser traffic, a new phoning system, enhanced damage and weather effects, and much more. Players returning from the PlayStation 3 and Xbox 360 version will get access to a host of new, exclusive content, including rare versions of classic vehicles from across the Grand Theft Auto series, activities such as wildlife photography, new shooting range challenges, new weapons, and more.

Included with Grand Theft Auto V is free access to Grand Theft Auto Online, which now will feature online play for up to 30 players on PlayStation 4 and Xbox One. The current community of players will have the ability to transfer their Grand Theft Auto Online characters and progression to their choice of either PlayStation 4, Xbox One or PC. In addition, all content and gameplay created for both Grand Theft Auto V and Grand Theft Auto Online will also be available for the PlayStation 4, Xbox One and PC, with more to come. Rockstar Games will continue to support both Grand Theft Auto V and Grand Theft Auto Online with new offerings throughout the year, including regular content drops and limited time event updates.

Rounding out our fiscal 2015 lineup will be 2K's February 10th launch of Evolve for PlayStation 4, Xbox One and PC. Developed by Turtle Rock Studios, Evolve is the only title in history to win Game of Show honors at both E3 and Gamescom in the same year. Consumer anticipation for Evolve continues to build, and starting tomorrow through November 2, the big alpha test for this unique four-versus-one multiplayer shooter will be available exclusively for 24 hours on Xbox One. In addition, the alpha text will be available on PlayStation 4 and PC from October 31 to November 2. While the alpha test is not fully representative of the final product, it will give our teams a chance to test the game in the hands of our most passionate consumers. And we will test it again on the opening day for Evolve exclusively for Xbox One in January. We remain incredibly excited about the potential for Evolve.

Looking beyond this fiscal year, we have a robust pipeline of titles in development. To date, we have revealed 2K's Battleborn, an all new intellectual property developed for next-gen and PC by Gearbox Software, the creative team behind our Borderlands franchise, which is planned for release during fiscal 2016. The title, which was featured on August cover of Game Informer, is a blended genre game that combines first-person shooting, cooperative combat, and an expansive collection of characters to deliver an all-new hero shooter experience. We'll have more to announce about our future lineup in the months to come.

In closing, I'd like to join Strauss in thanking our global teams for delivering a superb holiday lineup and continuing to execute our proven strategy of creating the most innovative and highest quality titles in our industry. I'll now turn the call over to Lainie.

Thanks, Karl, and good afternoon everyone. Today, I'll review our results for the second quarter and then discuss our outlook for the third quarter and fiscal 2015. 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 second quarter, net revenue was $135.4 million versus $1.27 billion in last year's second quarter, which had benefited from the record-breaking launch of Grand Theft Auto V. This result exceeded our outlook range of $95 million to $110 million due to stronger-than-expected catalog sales and digitally delivered revenue, particularly from Grand Theft Auto V, Grand Theft Auto Online, Borderlands 2, the WWE 2K franchise, and NBA 2K14.

Digitally delivered revenue accounted for $89.8 million of net revenue versus $105.5 million last year. Revenue from recurrent consumer spending, including virtual currency, downloadable add-on content, and online games, grew 45% and accounted for 58% of digitally delivered revenue. The largest contributor to digitally delivered revenue were offerings for the Grand Theft Auto series, the NBA 2K franchise, Borderlands 2, and Sid Meier's Civilization V.

Gross margin increased 19.4 percentage points to 58.6% due primarily to lower internal royalties and a higher percent of digitally delivered revenues.

Operating expenses were $110.3 million, down by $49.2 million as last year's second quarter included higher marketing expense for the launch of Grand Theft Auto V.

Interest and other expense was $2 million, a non-GAAP net loss of $35.4 million or $0.44 per share as compared to net income of $325.6 million, or $2.49 per share, in fiscal second quarter 2014. This result exceeded our outlook range of a loss of $0.60 to $0.70 per share. On a GAAP basis, we reported revenue of $126.3 million and loss from continuing operations of $41.4 million, or $0.51 per share.

Turning to some key items on our balance sheet at September 30, 2014 as compared to June 30, 2014. Our cash and short-term investments balance decreased to $803.8 million. Our Accounts Receivable balance decreased to $25.4 million, primarily reflecting the collection of receivables. Inventory increased to $55.9 million due primarily to build up for our October releases and software development costs and licenses increased to $327 million, reflecting the development efforts around our pipeline of upcoming releases.

Now I will review our financial outlook for the third quarter and fiscal 2015, which is provided on a non-GAAP basis. Starting with the full fiscal year, as a result of our better-than-expected second-quarter performance, strong current business trends, and positive outlook for our upcoming releases, we are increasing our outlook for both revenue and net income per share. We now expect net revenue to range from $1.4 billion to $1.5 billion, up from the prior range of $1.35 billion to $1.45 billion, and net income to range from $1.05 per share to $1.30 per share, up from the prior range of $0.80 to $1.05 per share.

Turning to the details of our full-year outlook, the majority of our revenue is expected to come from Grand Theft Auto V and Grand Theft Auto Online, NBA 2K15, Borderlands the Pre-Sequel, WWE 2K15 and Evolve. We expect the revenue breakdown from our labels to be roughly 60% from 2K and 40% from Rockstar Games. We expect our geographic revenue spread to be about 60% United States and 40% international. We expect gross margins in the mid to upper 40s%. Total operating expenses are expected to increase by approximately 7% driven primarily by personnel expense and a higher headcount, higher professional fees, and higher depreciation expense.

Selling and marketing expense is expected to be about 17% of net revenue based on the midpoint of our outlook range. And we predict interest and other expense of approximately $9 million, tax expense of about $44 million, and weighted average fully diluted shares of approximately 114 million. This reflects weighted average basic shares of approximately 80 million, 8 million participating shares for unvested stock-based compensation awards, and 26 million representing the potential dilution from our convertible notes under the if-converted method of accounting. Interest on the convertible notes net of tax is approximately $7.4 million which should be added back to net income to calculate net income per share under that if-converted method.

We expect to generate cash during the second half of fiscal 2015 and as a result of our better-than-expected results, increased outlook and cash receipt from the sale of Twitch, we now expect to be approximately net cash flow neutral for the full fiscal year. We continue to expect to generate cash from operations in fiscal 2016.

Turning to the fiscal third quarter, we expect net revenue to range from $745 million to $760 million and net income to range from $1.35 to $1.45 per share. The majority of our revenue is expected to come from Grand Theft Auto V and Grand Theft Auto Online, NBA 2K15, Borderlands the Pre-Sequel, WWE 2K15, and Civilization Beyond Earth.

We expect gross margins in the upper 40s%. Total operating expenses are expected to increase by approximately 33% from the prior-year third quarter, primarily due to higher marketing expense for our holiday releases. Selling and marketing expense is expected to be about 13% of net revenues based on the midpoint of our outlook range.

Our third-quarter outlook also reflects interest and other expense of approximately $2 million, tax expenses of $32 million, and weighted average fully diluted shares of approximately 114 million. This reflects weighted average basic shares of approximately 80 million, 8 million participating shares and 26 million shares representing the potential dilution from our convertible notes under the if-converted method of accounting. Interest on the convertible notes net of tax is approximately $1.9 million, which will be added back to net income to calculate net income per share under the if-converted method.

In closing, fiscal 2015 is poised to be among Take-Two's best years ever. We continue to benefit from top creative assets coupled with a sound financial foundation, which provide our organization the flexibility for us to execute our core strategy and to capitalize on new opportunities for growth. We are well-positioned to deliver non-GAAP profits every year for the foreseeable future and returns to our shareholders over the long-term.

Thank you. Now I will turn the call back to Strauss.

Thanks Karl and Lainie. On behalf of our entire management team, I'd like to thank our colleagues for their contributions to our success. 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.

Got it. Thank you. A couple of questions on GTA V. When you think about the huge player base that's out there, do think you can get a decent conversion among people to maybe try and buy GTA V? What's kind of your thinking around that?

And then could you reiterate or repeat those digital numbers? Did you say half of your digital is coming from GTA V? I just want a clarification on that.

And then maybe one for Lainie about the cash. Clearly going to be a year with solid earnings. Where are you deploying some of that cash that's not really coming through on the cash flow statement? Thank you.

Thanks Justin. In terms of GTA V, obviously having sold something like 34 million units of GTA V for what is now prior-gen, we know we attract a very significant core gamer audience and we also attracted people who are not core gamers. But we don't think we gad 100% market share of everyone who had platforms, and so we do think there is an opportunity for people who haven't yet enjoyed the title to enjoy it for next-gen.

Equally, when you do go buy a new platform, it seems to me it would be very exciting to have one of the most important titles in the industry. But we tend to like to talk about this stuff after it's happened, not in advance. Really proud of the lineup we have had, we are immensely proud of the achievements of the Rockstar team for GTA, and we are anxiously awaiting the November release. So, we will see how it goes.

And Lainie can answer your question about digital, and then I'll pick it back up on cash.

Okay. For digital, we said $90 million for the quarter was in digitally delivered offering, and 58% of that came from our recurrent consumer spending which grew 45%. So we didn't specifically break out what GTA Online was, but that's the information we gave around the digital business.

And then just in terms of deploying our cash balance, we've said repeatedly that we have used and expect to use cash to support organic growth. It's been a good story on organic growth. In 2007, our apples to apples net revenue was roughly $700 million. This year, we are guiding to $1.4 billion to $1.5 billion. Last year it was obviously well over $2 billion and that's all been generated to organic growth.

We are risk-averse folks. We don't intend to change that, certainly don't intend to be profitable yet, but we do see growth opportunities that we now have the ability to avail ourselves of, especially as we head into what we believe will be a very significant growth period driven by these new consoles coming online.

Secondly, we said we will contemplate accretive acquisition or inorganic growth. We have been very selective in anything that we've done so far and thankfully it's all worked out for us. That is something we cannot contemplate, but I want to emphasize that we are only interested in accretive deals, and I mean accretive within a reasonable period and accretive on a mathematical basis, not just a business model basis.

And finally, we've shown a willingness to return cash to the shareholders. We had a very meaningful stock buyback last year and that's another opportunity as well. So, minimally, there are three possible uses.

I think it's also worth noting in our business cash is a strategic asset. Like any entertainment business, there's an element of risk and volatility in our business. We have aimed very much to drive that out. We definitely have a much more predictable and much less volatile business than we used to have years ago. But having a meaningful amount of cash does allow one to play through the inevitable ups and downs of our business and to avail ourselves of opportunities when they do arise.

Great, thank you. Maybe one follow-up. Why would cash earnings be below operational earnings this year? I'm just trying to reconcile the difference between the cash flow statement and the income statement just for this year. It looks like kind of a difference between the two this year.

It's definitely a buildup of our development costs on our games and our strong pipeline going forward. That's what's causing the difference.

So growth in software -- for software development on the balance sheet?

Yes.

Justin Post.

Great. Thank you.

Eric Handler, MKM Partners.

Yes, thanks for taking my question. I wonder if you could talk a little bit about the state of retail right now as we sort of get closer to the holiday season. Are you finding that retailers are having a willingness to take on physical inventory, and are you seeing any skittishness as consumers sort of steadily migrate to more full game downloads?

Its' Karl. We've actually seen a very robust retail market and all of our retail partners have been enthusiastic about our titles. So, to the extent there's any skittishness in the market, and we have heard rumblings of some of it, we haven't seen any of it at this point. So we are very sanguine on what the state of the market is, and frankly, there's nothing we have been told by any of our partners that give us any significant concern. So we think it's going to be a fantastic holiday season and we are incredibly excited about the lineup that we have, which is a much bigger lineup than we are used to having at this time of the year. So, we feel good.

Okay. And just one follow-up for Lainie. It looks like operating expenses came in a little bit lower than expected. Anything going on there in terms of were those just reallocated or maybe some permanent taking out of the business? Just talk a little bit about that.

In Q2, what we saw is that operating expenses was a little bit lower in terms of our marketing expense and it was from timing, so most of that marketing we will see in the rest of the year in Q3 and Q4.

Thanks.

Drew Crum, Stifel.

Thanks. Good afternoon everyone. I wonder if you could comment on the decision to push GTA V on PC back to January and any impact that has on your guidance. And then separately, Borderlands the Pre-Sequel, could you comment on how it's sold or what the sell-in looks like relative to Borderlands 2? And then I have a follow-up. Thanks.

When we move a title, it's almost always the same answer, which is giving a title a bit more development time to make sure that it can be everything it ought to be. And while we would prefer never to change a release date, it's proven to be a good move for us in general because we have the highest Metacritic ratings in the business and that correlates with revenue and ultimately of course profitability.

In terms of Borderlands the Pre-Sequel, naturally it's available only for what is now prior-gen. It's not available currently for next-gen. We are very happy with the initial results. It remains to be seen; it's early days yet. But you wouldn't want to comp it to the last Borderlands. So, I don't think that would be an appropriate comp right now.

Okay, fair enough. And then just the last question, Strauss. As far as fiscal 2016 is concerned, you've made reference a couple of times to the "robust pipeline". You've got some momentum with digital and you expect to be net cash flow positive next year. Is it too early to comment on growth prospects for next year? How comfortable are you that the business can grow versus 2015? Thanks.

We feel good about the place the industry is in. Put Take-Two to the side for the moment, this has historically been an excellent time for the business, and a couple of our important peers are performing and have made pretty good announcements of late. The early stages of the launch of new hardware historically has been a very good thing for the interactive entertainment business, and this time around appears to be no exception. To the contrary, it looks like it's going to be a very robust period in terms of initial sell-in. The key competitors whose strategies makes sense, who have strong balance sheets, who have strong owned intellectual property and strong technical abilities, and we put ourselves on that short list, should be very well positioned. But we are not the only ones.

We've given as much color as we can on 2016. It's much more color than we used to give, frankly. We don't have much more to add now. And as we have marketing announcements, of course our labels will make them. But sitting here today, we feel -- obviously because we've increased our financial outlook for this year, we feel very sanguine about this fiscal year. And again, sitting here today, we feel as though 2016 is unfolding nicely as well, but it's early yet.

Got it. Okay, thanks guys.

Daniel Ernst, Hudson Square.

Yes, good evening. Thanks for taking my call. It seems interesting to me that two of the biggest games out this holiday are actually upgrades of prior games. One of course is yours in GTA V coming to next-gen, and the other is Halo being rereleased in all the series for at least one of the next-gen consoles. So, I'm wondering. Is that the treatment of other games in your deep catalog that you think are appropriate to migrate up to next-gen and be rereleased but upgraded?

And then two, the Halo thing is interesting in that it's repackaged the entire story into kind of one game. Is that something you might consider for GTA, given the deep history of that game, not just GTA V but all the way back the last decade or so?

And then two, also on GTA, I'm wondering if you could comment on what percentage of the people that have bought the game are still engaged with the game, either off-line or online, and in the online component, what percentage of those online players are also payers? Thank you.

Yes, in reverse order -- appreciate the question. This quarterly report continues to reflect that Grand Theft Auto Online has been a significant contributor to our results, and obviously we've repeatedly said we're gratified by how the title is performing, both the full game release as well as the online component, and we have been gratified by the long-lasting nature of that. But beyond that, we haven't given out much more data, and I don't see us doing that right now either.

In terms of the kind of titles we've put out, and I understand your question, in any given year, we and our key competitors launch new intellectual properties and new iterations of older properties. And occasionally, when we see a platform shift, we will take an old property and create an iteration of that in a very similar form for next-gen, and we wouldn't rule anything out. That would be driven by that market opportunity that we perceive and the potential for delivering a quality release, and that would be pretty much something that would also be driven by the passion of our labels. It would not be something that we would mandate to our labels. Our labels are driven by this desire to delight consumers and pursue their creative passions, and that's been a formula that has worked extraordinarily well for this Company for the past seven years.

So we don't have a policy answer to it except our job around here is to make sure that consumers are thrilled, to deliver the very best titles in the marketplace, and to make sure that, for the top creative talent in the industry, this is the number one place to work.

Thanks for the color.

Ben Schachter, Macquarie.

Congratulations on the continued solid execution. A few questions. Strauss, when you're talking about Rockstar, some investors still think it's just GTA. So, I was wondering if you could walk through some of the other key Rockstar franchises and comment on what they mean to Take-Two. And also can you tell us if there's any new IP that is being developed by Rockstar, or is everything in the pipeline based on existing IP?

And then coming at the GTA next-gen question a little differently, can we get a sense of what it looks like in your guidance versus the original launch? Does the guidance assume it's 10% as big, 20% as big, 30%, etc.?

And then just finally when you're looking at potential acquisitions, are you primarily looking to buy something very much directly related to video games, or are you looking more broadly in media? Thanks.

Let me take your first and your third and then I'm going to ask you to repeat your second after I've done that because you were speaking quickly and I'm slow on the uptake.

In terms of Rockstar, I think you know as well as anyone other franchises include Red Dead which has been massively successful for Rockstar and for our Company, the Midnight Club franchise, Max Payne and numerous other titles.

In terms of what Rockstar is working on in any given time, we really want our labels to make announcements and focus on the consumer end marketing and that something you would hear from Rockstar when the time is right.

In terms of acquisitions, the interactive entertainment business is the only growth business in the audiovisual entertainment business. And there are areas of that business to which we currently do not have exposure, so there's plenty of opportunity out there. But we don't rule anything out, as long as it fits with the Company's DNA, as long as it's high quality, and clearly would have to be digitally focused entertainment.

And I'm sorry, could you repeat your second question for me?

Yes. Just for Lainie, in the guidance, are you assuming that GTA V is 10% as big as the original launch or 20% as big, or what number should we be thinking about that?

We are not giving out details on a title-by-title basis of our assumption.

Can't blame a guy for trying.

Brian Fitzgerald, Jefferies.

Thanks guys. You announced the closed alpha of Evolve, and we've seen these closed alphas more frequently now. So just kind of wondering what kind of preorder brand lift do you generate out of these things, or is it more about benchmarking and scaling the online multiplayer pieces, or monitoring engagement?

And then, at the margin, does it drive more digital purchases versus retail purchases? Thanks.

It's Karl. I'd say it's definitely more of the latter in terms of the reason why we do this. It's really more to test a game out, to understand -- to get some consumer feedback, and to make sure the game is working properly so that we can adjust our development efforts as we see fit. There may be an incremental marketing benefit to it, but frankly that's not the primary reason that we would do something like that. It really is purely on the development side.

In terms of skewing towards digital, we really haven't done an awful lot of these, really, if any. So we don't have a lot of first-hand experience in terms of is it going to skew for digital. I suppose you could make an argument that, when you engage people in that way, they are already predisposed to downloading something digitally, because that's the way it's typically available. You could make that argument, but how it plays out, frankly, we really don't care because we don't care how people get it. We don't care if they download it; we don't care if they get it on a disc. It doesn't make a difference to us.

Thanks Karl. And then maybe one quick one. You pointed to broad strength across all platforms with NBA 2K. Any comments on traction differentiation across the platforms, or does it kind of correspond to market share? And when you mentioned the Amazon devices, any early traction you're seeing there with respect to gaming? And Android NBA 2K, is that exclusively on Amazon Android? Because you specifically call out available on iOS and Amazon devices. Thanks.

In terms of strength across the platforms, the good news is we are having strength in NBA across all our platforms. And in terms of waits between platforms, I don't think we are seeing anything terribly different than we have seen before. So the good news is that we feel good across all the platforms.

I'm sorry. What was the other question?

It's just on with respect to NBA 2K. You call out availability on iOS and Android -- I'm sorry, Amazon devices. That's not exclusive to Amazon Android, right?

Those are the only two platforms that we have announced anything or that they're on at this point, so we haven't talked about other platforms that it may or may not be on.

Okay. Thanks guys.

Edward Williams, BMO Capital Markets.

Good afternoon. Just to follow up a little bit, Karl, I know you don't care necessarily how the devices or the games are delivered, but can you give us a sense as to what sort of change you're seeing in terms of the digital distribution of full game downloads relative to what you've seen in prior cycles? And then also can you guys just follow up a little bit as to what the status is with some of the partnerships you've got going on in Asia?

In terms of digital, in terms of the strength of digital distribution, obviously digital distribution is incredibly strong, continues to strengthen in the PC market for us. It's a very, very, very important component of that market and we continue to see growth in that particular segment.

In terms of console, we are seeing strength across the board, digitally and also from the physical side. And in terms of is it -- are we getting more digital, I would say that certainly there's more digital activity at this point, but it's not something that we see is changing in a rapid fashion that is worth noting at this point.

In terms of China, things are going well. NBA 2K China Online continues to perform well. We continue to be optimistic about Civilization coming, and we are excited.

Okay. Thank you.

Larry Haverty, GAMCO.

Hi. I just have a couple of questions. One, do you have a strategy with regard to removing the convert? Are you going to force conversion at the first opportunity, and could you walk us through what that is, or just let it sit there so that people who want to own equities can show that they are owning bonds?

One of the most recent -- the earliest convert is going to be up in 2016, so it doesn't really seem to make sense right now for us to do anything about that until that time, but we continue to look at it and see if there's an opportunity to make any changes in our capital structure.

Okay. And the second thing is do you have any view on what the marketing plans are for the next-gen systems from Sony and Microsoft for the fourth quarter? It's been reasonably silent, and so far it looks like the next-gens are selling quite well. But I'm just interested in any insights that you might have on what the game-box guys are actually doing to get more of these products into consumer hands.

We agree that we are very encouraged by the sales of next-gen devices. Things are going really, really well. I know that everyone is expecting a very hot season this year.

In terms of specific marketing plans, we really don't know any more than you guys do, what they publicly announced. We know that Microsoft has announced a pricing change, which should certainly benefit the installed base on that platform. But in terms of specific plans, that's something that we don't know.

Thanks.

Arvind Bhatia, Sterne Agee.

Thank you, and if I can add my congratulations on a solid quarter. I have a more general question for you guys. In the past, we've all looked at preorders as a good predictor of success for games. With more stuff happening digitally, more full game downloads, etc., I'm wondering how you are thinking about games as you develop them. What do you monitor? Is it social media chatter? Is there other things, particularly with something like Evolve? How are you thinking about that? And then I have a follow-up.

Yes. Presales tend still to be a pretty good leading indicator. Awards, covers, press, social media and the like can also be good indicators. And we do have market research that tracks that, as do our competitors. So, with social media, there is a bit more insight than there used to be, and I would say we have a pretty good sense of that. We also need to because retail is our partner, and we need to make sure what we are willing to ship is a reflection of what we think the demand is.

So I guess what I was trying to figure out is preorders are still the number one way that you are trying to figure out the potential for a game at this point?

Not really. They definitely will tell us something about launch quantities, but they don't tell us all that much about lifetime. But Metacritic ratings, for example, which you obviously don't know until after you've established your launch quantity, can tell you something about that. So, I would say that preorders are important in terms of launch for many titles, not all. There are titles that have a long tail. Our Civilization titles tend to have a very long tail. In other instances, it can tell you a great deal. But you'll want to see how the title rates, and then, generally speaking, how consumers like it after it's in the market to get a sense of your lifetime sales.

And then my other question is a follow-up on the full game downloads question. I know that Karl mentioned it's not really material yet. Some of the competitors are talking about 10% to 15% of volume going through digitally. When you think about GTA V, do you think that you would be thinking about, for planning purposes, something like that, or just wondering how you think about it?

It's Karl. Just to clarify, I didn't say it wasn't material. I actually said we just didn't care. There's a pretty big difference there. Whether it's download, a full game download or on a disc, it's a relevant to us. But you can pretty much assume that we are experiencing the same kind of numbers as everybody else because it's kind of an industry phenomenon. It's not a company-specific or even -- it can be a title-specific phenomenon, but it certainly isn't a company-specific phenomenon. But the point is that it doesn't matter to us.

In terms about our expectation about percentage digitally downloaded for GTA, we wouldn't share that with you. And again, it's not something that we really focus on to begin with.

We want to be wherever the consumer is, and we have said that our margins on digital distribution are a bit higher. They are for the industry as well. But in terms of margin dollars, there's a bit of a difference in our favor, but not much. We can't control that. What we can control is making sure we are ubiquitous, that we are wherever the consumer is. Our belief is that's our job, and we can vote. The consumer votes, so it's our job to just make sure that the options are available.

Great. Thanks guys.

Neil Doshi, CRT Capital.

Great. Thanks for taking my questions. Do you guys launch mobile games like NBA 2K15 for iOS? Do you feel like these games are bringing new people to the franchise, or are you primarily getting people who own the console version and just wanted an opportunity to continue to engage in play with these games when they are kind of away from the console?

And then Lainie, on the gross margins, I think that's the highest we've seen to date. Any thoughts on where gross margins could go long-term, especially if digital continues to ramp up and become a more important part of your revenue mix? Thanks.

It's Karl. I would say, to answer your first question about NBA mobile, I would say that it's both. There are people who are engaged specifically with the mobile titles and there are people who engage with both, with the console title and use the mobile titles in a companion fashion. And some of our mobile releases are actually designed to be companion to the console, but not necessarily tethered to or specifically required in order to play. So the answer to your question is both.

And we also experience the same thing in WWE. We have WWE SuperCard, which is one of our most successful mobile releases from 2K to date, which you can play on a standalone basis but also have some connections into the console game. So it really is both.

In terms of the gross margins, for this quarter, we saw a bit of a higher margin based on our current consumer spending being a big part of the business in the quarter. And then for the full year, we said we're going to be mid to upper 40s% for the year, and that's also been driven by our current consumer spending that's becoming a bigger part of our business this year. And we hope to see that going forward.

Stephen Ju, Credit Suisse.

Thanks guys. So Strauss, I think you've consistently said before, and correct me if I'm wrong or putting words in your mouth, but your willingness to take some of your existing franchises global will be low cost and probably deliberate and careful. But given that you are alluding to what appears to be traction with NBA 2K in China, and that has been in the market for some time now, has that changed your attitude or willingness to step up the risk curve a little bit and perhaps speed up the process of taking your content to the global audience? Thanks.

Our content is already available to a global audience. We have direct distribution in the far corners of the world, and it's one of the things we are most proud of. Our titles are available virtually everywhere. And of course, there are limitations in China, although that market may well be opening up also. As you probably know, consoles are launching there. There are still going to be significant content restraints, but we think there potentially are some opportunities.

If you are referring to other forms of our franchises like NBA 2K Online and Civilization, selectively, we absolutely would like to pursue those. And we are somewhat less risk-averse than we used to be, partially based on the success we've enjoyed and partially based on the balance sheet we now have. But this remains a very, very disciplined management team.

We operate in a risky business, the entertainment business. And what makes this company work is that, more often than not, we deliver a hit. We have an exceedingly hit ratio. What makes this company work is that we have the strongest creative talent in the business working on the best collection of owned intellectual property, delivering the highest quality products in the business according to Metacritic for I think the last six years in a row. Those things are all important and they are easy for me to talk about and really, really hard for our teams to accomplish, really hard. We have to wake up every day and do it all over again, and we never ever take it for granted. We do not believe it's owed to us, and it comes based on the dedication of more than 2,500 people who work at this enterprise around the world. So easy for me to say, easy for us to brag about, really hard to do every day, really important to do every day. And as we do more and more of that, we have the opportunity very, very judiciously to take on a bit more risk to build our enterprise. And that's what's helped us grow this company organically from some $700 million in net revenue just really what was a few short years ago. And we aim to grow profitably on an ongoing basis. But saying those words and doing the job are two very different things. And we are exceedingly mindful of risk, and we see ourselves as very careful stewards of our shareholders' capital, and that's not going to change.

Thanks.

Ladies and gentlemen, there are no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Briefly, we've spoken an awful lot today. Thanks for all the questions. Thanks for your attention, and we'd like to wish you all a happy and healthy and prosperous holiday season.

Ladies and gentlemen, this concludes our teleconference for today. You may now disconnect your lines at this time.