Greetings, and welcome to the Take-Two Second Quarter Fiscal Year 2014 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 and Corporate Communications of Take-Two Interactive. Thank you, sir, you may begin. .

Good afternoon. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the second quarter of fiscal year 2014 ended September 30, 2013. Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie Goldstein, our Chief Financial Officer.

We will be available to answer your questions during the Q&A session following our prepared remarks..

Before we 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 June 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'll turn the call over to Strauss. .

Thanks, Hank. Good afternoon, and thanks for joining us today. I'm pleased to report that Take-Two delivered record non-GAAP revenue and earnings during the fiscal second quarter, driven by the unprecedented worldwide success of Grand Theft Auto V.

Consumers and critics alike responded passionately to the title, enabling it to become the fastest-selling entertainment release in history, with retail sell-through of more than $800 million in its first day and over $1 billion in only 3 days..

Held by the New York Times as "the most immersive spectacle in interactive entertainment," Grand Theft Auto V received extraordinary reviews, including over 160 perfect scores. The title has already sold-in nearly 29 million units worldwide, exceeding the lifetime sell-in of Grand Theft Auto IV on console in less than 6 weeks after launch.

And demands remain strong, as consumers immerse themselves into the vast world of Grand Theft Auto Online..

We are immensely proud of and grateful to the team at Rockstar Games, who consistently redefine what can be achieved in interactive entertainment. I'd like to congratulate them all on delivering an unparalleled experience and superbly marketing Grand Theft Auto V in a way befitting a cultural phenomenon.

I'd also like to thank our sales team for their critical role in making this launch one for the record books..

In addition to Grand Theft Auto V, our second quarter results benefited from robust demand for our digitally-delivered offerings and renowned catalog titles.

Revenue from digitally-delivered content grew 85% year-over-year, driven primarily by full game downloads and add-on content, along with smaller contributions from virtual goods and mobile offerings. .

Brave New World, as well as the first add-on content for Irrational Games' BioShock Infinite, and additional add-on content for Borderlands 2..

It bears noting that the phenomenal success of Grand Theft Auto V, along with the strong performance of our other recent AAA releases, continues to demonstrate consumers' enduring appetite for ground-breaking interactive entertainment.

During a challenging period for many in our industry, our past foremost significant current generation releases, Borderlands 2, NBA 2K13, BioShock Infinite, and Grand Theft Auto V each sold-in more units than any prior title from their respective franchises within the same period after release.

We believe it's our unwavering commitment to quality, one of Take-Two's core philosophies, that has been, and will continue to be, our distinguishing pathway for success..

As a result of our significantly better-than-expected second quarter results and our positive business outlook for the remainder of the year, we are increasing our financial outlook.

Fiscal 2014 is poised to be a record year for our company, with projected non-GAAP net revenue of $2.2 billion to $2.3 billion, and non-GAAP net income of $3.50 per share to $3.75 per share..

Looking ahead, we're highly enthusiastic about the opportunities presented by next-generation consoles, which are launching in November. We have a robust development pipeline of new intellectual properties and offerings from our proven franchises, including multiple unannounced titles planned for release during fiscal 2015.

In addition, we'll continue to invest to enhance our profitability with innovative digitally-delivered offerings for both traditional and emerging platforms..

Our company has all of the assets necessary for ongoing success, including world-class creative teams, the strongest portfolio of intellectual property in the business, cutting-edge technology and a sound financial foundation.

We're better positioned than ever to deliver returns for our shareholders and expect to be profitable on a non-GAAP basis in fiscal 2015 and every year for the foreseeable future..

I'll now turn the call over to Karl. .

Thanks, Strauss. Today, I'll give an update on our recent releases and development pipeline. I'd like to begin by joining Strauss in congratulating Rockstar Games on their phenomenal launch of Grand Theft Auto V. Enhancing this incredible experience is Grand Theft Auto Online, which had its initial rollout on October 1.

This ambitious undertaking offers a dynamic and persistent online world, and is available free with every copy of Grand Theft Auto V.

It currently shares gameplay features, geography and mechanics with Grand Theft Auto V that will continue to expand and evolve over time with new features and functionality, as well as new content created both by Rockstar Games and the Grand Theft Auto community.

This is the beginning of something new and exciting, and we're very enthusiastic about the opportunity for Grand Theft Auto Online to enhance consumer engagement with the series over time..

Featuring NBA MVP LeBron James on the cover, NBA 2K14 launched on October 1 and, according to Metacritic, is currently the highest-rated sports game of 2013 on both PlayStation 3 and Xbox 360.

ign.com remarked that, "NBA 2K14 is simply the best hoop sim ever." Incorporating the series' signature realism, intuitive new controls and unique game modes, this year's release cements NBA 2K's legacy as the industry's premier sports simulation experience.

The title is being supported by NBA 2K Everywhere, our multiplatform offering that gives fans the opportunity to enjoy NBA 2K via a mobile companion app, as well as a full-featured version of the console simulation game for tablets and smartphones..

NBA 2K14 will also be our first release for the PlayStation 4 and Xbox One on November 15 and 22, respectively. Built entirely from the ground up for next-generation platforms, NBA 2K14 features a revolutionary new Eco Motion game engine, and 4 entirely new experiences, including NBA Today, MyCareer, MyGM and MyTeam.

ign.com voiced their anticipation, stating, "NBA 2K14 could end up being the most technically impressive launch game on either next-generation platform." With unparalleled true-to-life visuals and a groundbreaking feature set, we believe NBA 2K14 will define the standard for next-generation sports simulations.

I'd like to congratulate the teams at 2K and Visual Concepts for delivering 2 uniquely different basketball experiences of the highest quality, built specifically to leverage the strength and features of both the current generation and next-generation consoles..

On October 8, Borderlands 2 further expanded its audience with the release of the Game of the Year Edition, which offers an outstanding value to consumers, including the full game, all of the Season Pass add-on content, 2 additional character classes and more.

Demand for Borderlands 2 and it's add-on content remained strong for more than a year after its initial launch, and we remain committed to supporting the franchise with additional high-quality content. .

T.K. Baha's Bloody Harvest. With 2 more add-ons planned for the released during 2013, Borderlands 2 has sold in over 7.5 million units and counting, and is on track to becoming the highest-selling title in 2K's history..

Today, 2K successfully launched WWE 2K14, the latest offering in the popular WWE video game franchise. The title is being supported with a comprehensive selection of downloadable content, including Rockstar editions, fan-favorite gameplay and customization options, which will be available next month through January.

This add-on content, which can be purchased individually or through the game's Season Pass program, provides the ultimate WWE video game experience that is perfectly timed for the holiday season..

Enemy Within is a fantastic expansion to one of 2012's best games. .

Burial at Sea, a 2-part add-on campaign set in the underwater city of Rapture before its fall; and the Sid Meier's Civilization V Scrambled Nations pack, which will include maps from Canada, Australia, Japan, Scandinavia, Great Britain, France, Turkey, Italy, Russia and China, and features randomized interiors with the start of each new game..

Looking ahead to fiscal 2015 and beyond, we have a strong development pipeline for both traditional and emerging platforms, including revolutionary new intellectual property and offerings from our existing franchises. For example, last January, we purchased the intellectual property for Evolve from THQ.

This next-generation title is currently in development at Turtle Rock Studios, the renowned creators of the innovative, cooperative first-person shooter, Left 4 Dead. .

In addition, 2K recently opened a new Bay Area studio, focused on developing an exciting next-generation title. .

These represent just 2 of the more than 10 unique titles in our pipeline for next-generation consoles, which includes multiple releases planned for fiscal 2015.

We understand and appreciate that both our consumers and shareholders are eager to learn more about our release schedule, and we expect to begin unveiling titles during the next several months..

Throughout the past year, we've demonstrated that success in our industry is achieved by mindfully balancing the passion to take creative risks with prudent business management.

The need to deliver the highest-quality entertainment has never been more important, and we believe that consumers will continue to seek the most groundbreaking and immersive experiences as we enter the next generation for our industry.

Take-Two is well prepared to continue to raise the bar for creative excellence across all platforms that consumers choose to embrace..

In closing, I'd like to join Strauss in thanking all of our employees for their dedication and hard work during the quarter. Thanks, and I'd now like to turn the call over to Lainie. .

Thanks, Karl, and good afternoon, everyone. Today I'll review our results for the fiscal second quarter and then discuss our updated outlook for fiscal 2014 and our initial outlook for the fiscal third quarter.

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

Note that our GAAP results exclude net revenue and cost of goods sold related to sell-in of the Grand Theft V game during the second quarter, as Grand Theft Auto Online, a free game available with every copy of Grand Theft Auto V, launched during the fiscal third quarter.

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

Starting with our results for the fiscal second quarter. Net revenue increased 340% to a record $1.27 billion. This exceeded our outlook range of $750 million to $800 million due to the blockbuster worldwide success of Grand Theft Auto V. .

Catalog sales accounted for $118.9 million of net revenue, led by Grand Theft Auto IV and offerings of Borderlands 2 and Civilization V. .

Revenue from digitally-delivered content grew 85% year-over-year and accounted for $105.5 million of net revenue, the largest contributor to the Grand Theft Auto series, particularly digital sales and Grand Theft Auto V and offerings to Borderlands 2, Civilization V and BioShock Infinite..

Gross margin decreased 4.5 percentage points to 39.2% due primarily to higher software development costs and internal royalties. .

Operating expense were approximately $159 million, up by about $47 million, due primarily to higher marketing expenses to support the launch of Grand Theft Auto V. .

Interest and other expense was $3.8 million. And non-GAAP net income was $325.6 million or $2.49 per share, as compared to $10.2 million or $0.11 per share in fiscal second quarter 2013. This result exceeded our outlook range of $1.20 to $1.35 per share.

On a GAAP basis, we reported a net loss from continuing operations of $124.1 million or $1.40 per share..

Turning to some key items from our balance sheet at September 30, 2013 as compared to June 30, 2013. Our cash balance increased to $661.9 million. Our accounts receivable balance increased to $1 billion, primarily reflecting the receivables associated with the release of Grand Theft Auto V near the end of the second quarter.

Inventory increased to $84 million, primarily for inventory on hand for replenishment orders of Grand Theft Auto V and the launch of NBA 2K14 in early October. And software development costs and licenses decreased to $233 million, reflecting the amortization of development costs for our second quarter releases..

In August, we completed the redemption of our 4.375% convertible senior notes due 2014, which we had called for redemption on June 12. The company settled the 4.375% notes, which were surrendered for conversion for approximately $166 million in cash and 3.2 million shares of common stock.

In conjunction with the redemption, we unwound the call spread associated with the notes, which resulted in the company receiving approximately $29 million in cash..

Now I will review our financial outlook for the full year and third quarter fiscal 2014, which is all provided on a non-GAAP basis. We are increasing our financial outlook for fiscal 2014 to reflect our strong second quarter results and positive outlook for the remainder of the year.

We now expect non-GAAP net revenue to range from $2.2 billion to $2.3 billion, and non-GAAP net income to range from $3.50 per share to $3.75 per share. These would be record results for our company..

Turning to the details of our full year outlook. Our expected revenue range assumes the on-time release of the titles we have planned for launch during the remainder of fiscal 2014. We expect the revenue breakdown from our labels to be roughly 70% from Rockstar, 30% from 2K.

We expect our geographic revenue splits to be about 50% United States and 50% international. We expect gross margins in the low 40%. Total operating expenses are expected to remain flat. Selling and marketing expense is expected to be about 11% of net revenue, based on the mid-point of our outlook range.

And we project interest and other expense of approximately $12 million, tax expense of about $16 million, and weighted average fully diluted shares of approximately 126 million..

This reflects weighted average basic shares of approximately 91 million, 9 million participating shares for our unvested stock based compensation awards, and 26 million shares representing the potential dilution from our convertible note under the "if-converted" method of accounting..

Turning to our outlook for the third quarter of fiscal 2014, we expect non-GAAP net revenue to range from $650 million to $700 million, and non-GAAP net income to range from $1.20 to $1.35 per share. The majority of our revenue in the third quarter is expected to come from Grand Theft Auto V, NBA 2K14, WWE 2K14 and Borderlands 2.

We expect third quarter gross margins in the mid-40%. Total operating expenses are expected to increase by approximately 15% from the prior year's third quarter, driven primarily by higher sales and marketing expense. Selling and marketing expense is expected to be about 10% of net revenue, based on the mid-point of our outlook range..

Our third quarter outlook also reflects interest and other expense of approximately $2 million, tax expense of about $7 million and weighted average fully diluted shares of approximately 131 million.

This reflects weighted average basic shares of approximately 93 million, 11 million participating shares of our invested stock-based compensation awards, and 27 million shares representing the potential dilution from our convertible notes under the "if-converted" method of accounting..

In closing, the consistent execution of our strategy, along with a disciplined approach to capital investment, has enabled Take-Two to achieve strong results.

We are well positioned to capitalize on the next generation of consoles, as well as emerging markets and platforms and, most importantly, to deliver consistent profits and returns to our shareholders over the long term.

I would like to thank our employees for their tireless commitment to excellence and working together to bring continued success to our organization. .

Thank you. And now I'll 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 efforts in delivering a history-making quarter for our company. And to our shareholders, I'd like to express our appreciation for your continued support. We'll now take your questions.

Operator?.

[Operator Instructions] Our first question comes from the line of Justin Post with Merrill Lynch. .

You obviously have a huge installed base growing, a record installed base.

Can you talk a little bit about the gameplay activity that you're seeing, either online or just in total, relative to other huge hits like Call of Duty and Battlefield? And then how do you think about leveraging that activity into some digital sales next year? And then the second question is, as we enter the next-generation transition, does that create any interruptions or disruptions with Rockstar's game pipeline, or is it still possible to see a consistent, like, 1 release per year?.

Justin, it's Karl. In terms of the online activity for GTA, obviously, we haven't spoken about the specifics. But needless to say, we've had a very, very positive response. And there are many, many, many players playing at this point and it's going very well.

And we've gotten terrific feedback from the community in terms of things that they really love about it. So we're very excited about the opportunity for GTA Online. It's something that we think is very special and unique, and is going to be with us for a very, very long time in the future.

In terms of monetization, Rockstar has talked about monetization, and there will be -- there are cash backs available. They're not available right now, but they will be turned on back again at some point in the near future. .

And in terms of -- this is Strauss speaking, your second question. Look, we try not to pat ourselves on the back overly. I do think history says that we managed the console cycle reasonably well in terms of delivering our products at the right time. And I think the release window for GTA V was phenomenal.

There was an enormous installed base, massive anticipation and virtually no significant competitive releases. I was questioned an awful lot, you may recall, about the timing of that release.

And I think Rockstar made a great decision in putting it out when they did, and really optimized the intersection of what a great game can do and what an audience wanted and when they wanted it. We now come to the end of our current gen releases. It's exactly the right time at this company.

And as we said today, we have more than 10 titles in development for next-gen, and we're confident enough about that pipeline that we're calling for profitability on an ongoing basis, something that none of us around here does lightly, and something that all of us around here are really proud about.

So Rockstar and 2K, both, are operating with within the reality that we have 2 platforms launching in November, about which we're all really excited. And we have great titles coming up. .

Our next question comes from the line of James Hardiman with Longbow Research. .

Help me in whatever way you can, sort of bridge the gap between $1 billion in 3 days and 29 million units sold life-to-date.

How much of that 29 million was second quarter versus third quarter? How much was sell-in versus sell-through? Can you give us a sell-through number at this point? Can you help us out with the ASP? And ultimately, I guess one of the things that would be really helpful for us is just figuring out how much inventory is sitting at retail, as we sit here today, of Grand Theft Auto?.

James, it's Lainie. We really can't give out additional information than what we've said to date. But I can just point you to the $1 billion is a retail figure. The 29 million units is a sell-in number, and that's what we've done to date, and the $1 billion was in the first 3 days. So there is big differences between those 2 numbers. .

Right. I guess that's sort of the point. I guess let me ask you in a different way.

Are you sitting on a bunch of inventory as we sit here today, which would assume that the retail number isn't anywhere close to that $29 million number -- or 29 million unit number, I should say? Or I guess, asked a different way, as we think about your second quarter guidance, do you continue to assume that you're going to be shipping copies of GTA in the December quarter?.

Yes, it's a fair question. The industry, in general, has been very tight on inventory as they head into the end of the cycle. We don't comment on our own inventory levels around here.

And in terms of our expectations going forward, yes, we fully expect to keep selling lots and lots of this game, and I think the fact that we've sold in more than 29 million units to date in 6 weeks is pretty extraordinary. So demand remains very, very strong indeed.

I think it's a fair question, because I think some people have asked us to put a finer point than you did on your question. It was just a reflection of all the demand being pulled to current, but there's just no evidence that, that's the case at all.

It's not as though consumer say, the next-gen is coming, so I have to buy this title and then I'm never going to buy it again. It's not how they operate. This is a reflection of our finest hopes coming true, which was the intersection of a massive installed base with a massively popular title. .

Very helpful. And then, Lainie, maybe you can help us a little bit with just the accounting of how all the development costs associated with GTA are going to work.

What portion of those costs -- I know you're not going to give us a number, a total budget, but can you help us with what portion of those costs have already been expensed and how we should think about the rest getting expensed as we move forward? And then as we think about the DLC portion and I guess, more specifically, the online portion, were those development costs capitalized and are they going to be expensed along with the development cost for the individual game? How should we think about all that?.

So for the development costs, the way we'll look at it is, on a non-GAAP basis, it will be with the revenue. So we take the revenue for the period and then we'll take what the estimated lifetime revenue is, and the expenses will be spread over that period of time for a non-GAAP basis.

The online development costs also have been capitalized alongside with the online game and it, again, will be spread along with the revenue. .

So I guess to ask a different way, at what point -- what's sort of your assumption with regards to the "lifetime of the game"? Or as we move forward, presumably margins get better, right, as we burn off the majority of those development costs, When does that sort of end? At what point in the future will -- are you projecting to have expensed through all those development costs?.

Yes, we actually don't guide that tight. We basically -- what Lainie is saying is on a non-GAAP basis, we aim to match the revenue and the development costs and the initial cycle of releases.

And you're absolutely right, when something rolls off into our catalog, we're no longer amortizing development costs, we typically don't in marketing costs, and therefore, the gross margin would indeed be higher. But we're not quoting any specific timing or numbers today. .

Yes. Each quarter we'll update our estimated lifetime for the product, and that can adjust where the cap's off our amortization is. But basically, is over what that lifetime is estimated to be, and that can change over time. .

But ultimately, as it hits your catalog, it hits your catalog. And it ultimately has no cost profile associated with it, apart from the cost of actually shipping the goods on an ongoing basis. .

But the profile of sales is based on what we know today as opposed to what you guys were projecting initially for the game?.

Well, we would update our estimates every time. So based on the way the title launched and where -- I'm saying that it performed better than our expectations, yes, the lifetime would probably also be adjusted each quarter. .

Our next question comes from the line of Ben Schachter with Macquarie. .

you have the full game downloads; you have the digital episodic content that potentially could come for GTA V; and then separately, GTA online. Is that the correct way to think about it? And then one follow-up on for Lainie. .

Ben, do you mean by biggest download, the biggest-size download? Or the biggest number of downloads?.

I guess either revenue or number of downloads for a full game?.

I don't think we actually know the answer to the first question. I suspect it probably is the biggest game that was ever downloaded... .

It was certainly the biggest on the PlayStation Network on the day release. It was the biggest at first-day on platform. But other than that, we know -- we don't have... .

But in terms of the number of bytes, I suspect, it's also the biggest, but I could be wrong about that. And we've talked about margins before. We've basically said our margins on digital distribution are somewhat higher than on physical distribution, but not meaningfully higher, typically.

And in terms of the way you parsed digitally-delivered revenues here, yes, you've got it correctly. And I suppose I'd add to that, ultimately, catalog. But full-game download, DLC and in-game payments, that would all constitute digitally-delivered revenue. .

Great. And then Lainie, if I could just follow up on the cash. Based on the guidance you've given, what do you expect the cash balance to be by the end of '14? And if any of you want to update us on your thoughts about potentially returning excess cash to shareholders, that will be great. .

For the cash balance, we don't provide cash flow projections. We are going to be cash flow positive for the remainder of the year, from this point forward, as well as the whole year. And you asked a question, what's the use of cash. So as we said before, we've been investing in our business, looking at acquisition opportunities.

If we think it makes sense, we have authorized a share repurchase program. So if the opportunity presents itself and it makes sense for us, that could be an option for us as well. .

Our next question comes from the line of Eric Handler with MKM Partners. .

A couple of follow-ups to Ben's questions.

First of all, what percentage of the 29 million units sold for GTA were full digital downloads? Secondly, when you look at your buyback -- looks like you haven't done any share repurchases yet, but given how strong your earnings were and your confidence in the business, is there a reason why -- I would assume you think your shares are relatively inexpensive, why you're not buying back stock? And then third, with GTA Online, as more people start migrating over time to the next-gen platforms, will next-gen players be able to access GTA Online?.

Yes. So we said that in the quarter about 8% of our revenue was from digitally-delivered offerings across the board. We're not talking specifically about GTA V's percent related to digitally-delivered revenue. But I think that gives you a certain amount of guidance, obviously.

And in terms of share repurchases, we didn't repurchase any stock in the fiscal quarter. We do have an authorized stock repurchase outstanding. And we do have ample capital to pursue all the opportunities that Lainie outlined. We are a very conservative management team.

And as we head into a platform transition, companies with meaningful, strong balance sheets are well positioned, and that's very important to us. So first and foremost, we want to be rock-solid around here. Secondly, we are looking at, and always have looked at, accretive M&A. And let me emphasize accretive.

We don't -- accretive is not in the eye of the beholder, it's actually math. And we're interested in accretive M&A that fits with our core business. And third, of course, over time, one must and should look at returning capital to shareholders in an appropriate way, and there are numerous ways that, that can be achieved. .

And Eric, as of GTA Online for next-generation, I think, was your question. We haven't discussed any plans for GTA, at all, in relating to next-generation. So nothing to say there. .

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

Strauss, looking again at the opportunity to monetize the large installed base of GTA V. I recall last time around with GTA IV when you released expansion packs, whether they were digital or offered on disc, like Lost and the Damned, the one issue was that they came out significantly later than when the game did.

And I believe you made a comment at that time that, that was kind of one of the lessons learned to get those kind of expansion packs out sooner.

And then since that time, a trend has emerged among other large games to sell sort of a Season Pass to a series of announced expansion packs, which many people have the opportunity to buy when they buy the game in the first place. So you have a large installed base, 17, 20 million people who already have the game who didn't get that opportunity.

Can you speak to -- I know you want to give the exact roadmap, but what the opportunity to sell add-on content to the single-player campaign as opposed to the micro transactions.

Is that still in the cards? Or can you give us a little bit of color on what might we see there?.

So we always prefer that our labels talk about our marketing plans, and we tend not to discuss them on the call. I appreciate the thoughtful question, and we give a lot of thought to just the questions you raise.

I think the biggest difference here is -- than the last release is, when Rockstar came out with downloadable content for GTA IV, this was groundbreaking stuff. It had never been done before. And they took a big creative risk and delighted consumers and made money in the process. So it was really a great result.

And we, at this company, and our label, specifically, have learned a lot about what consumers want. But what we find is, when you have a hit product, there is an opportunity to continue to delight consumers with ongoing content, and that always remains our focus.

Our focus around here did not start with how do we look at our consumers, they showed up in droves and how do we extract more money from their pockets. We genuinely don't. What we think about is, the reason our consumers showed up is because we delighted them in a way they didn't expect.

As high as their expectations were, we blew them out of the water and we did that because of the extraordinary creative work done at Rockstar. And then that's the way this company operates.

And then having done that, we think, okay, now what is the appropriate way to price this experience so that we can appropriately compensate all of our stakeholders, the people who create the products, the employees who work at this company and of course, our shareholders? And we've always looked at pricing all of our content with an eye towards giving people more than they pay for, trying to overdeliver.

So GTA Online is free with the game. And it's the first time we've ever done anything like this. It's incredibly ambitious and taxing and challenging. And consumers love it, and they're showing up in great magnitudes.

As Karl said, there is currency in the game and there are plans, at some point, to make that currency available for cash payments in addition to other ways you can earn currency in the game. We'll let Rockstar talk more about that. We don't need to talk more about that today. But for sure, we're commercial folks, and we are in business.

But where we start here is with a passion for what we do, then we think about how what we do is going to delight consumers. And then, and only then, do we think about how we're going to monetize it. .

And a follow-up to that question, perhaps for Lainie.

Is the cost of maintaining GTA Online a material part of your OpEx going forward, or is that sitting in COGS? And can you give us just a scale of how big an ongoing cost maintaining the server is, and systems around that platform are?.

The costs would be included in our -- what we capitalize and then spread over the revenue stream, included with the overall capitalized software for GTA. But it is a good question in terms of how much that's going to be going forward.

There will be some of it, the server cost and things like that in the OpEx, but most of the time and effort by the teams will be included in the cap's software. .

And let me just emphasize, in one of our stated strategies is to be the most efficient company in the business. We did not go out and build a massive infrastructure to support something before we understood where consumers were going to be -- where they were going to be.

We are learning every day how to do this in a high-quality way, and there will be some costs associated with it. We have 0 doubt that the revenue will vastly exceed any operating expense. .

Our next question comes from the line of Arvind Bhatia with Sterne Agee. .

Most of my questions had been answered. Just a couple of small ones. One, as you talk about your next-gen and the 10 titles in development I assume you have now a pretty clear picture of what the initial net costs are going to look like in your plans.

And directionally, I'd like to just get some comfort level on how these costs are shaping up versus your expectations versus perhaps the lifecycle, et cetera.

Any changes to your thinking? And then lastly, just a quick update on Asia and what's going on there and opportunities that you see in the coming quarters and years?.

Yes. In terms of dev cost for the more than 10 next-gen titles we have in development, we do spend meaningfully on our games, it's how we have the highest-rated games in the business. We don't, so far, see meaningful differences in what it's going to cost to develop for next-gen versus what it's been costing to develop for current-gen.

And in terms of Asia, what we've said is that NBA 2K Online is one of the top 10 played games in Internet cafés, according to QQ Games in China. We're very happy with those results and continue to be closely engaged in optimizing and contemplating, expanding that throughout other parts of Asia. We have our baseball game in Korea.

That's operating as well. And we continue to develop another game in Korea, Civilization Online, so -- which we've talked about previously. That's still in development. So it remains a very interesting area for us, and it's nice to have 2 games in market. .

But there's talk about consoles in China recently. I wonder if you think that, that is really an opportunity.

I know this is just talk right now, but do you really see that as an opportunity for you out in the future?.

be the most creative, the most innovative, and the most efficient company in the industry. .

Our next question comes from the line of Mike Hickey with The Benchmark Company. .

I know you're sensitive to this but, obviously, the online piece is pretty important, I would think, to for your fiscal '15 profitability. Can you give us any sense -- and obviously, there's excitement and buzz from it.

There's also somewhat a glitch from the beginning which, I think they -- Rockstar did a pretty good job at kind of communicating that it was going to be a work in process.

But any sense of just kind of general engagement metrics that we can look at, Strauss, as we try to shape as sort of forward performance opportunity in terms of player conversion, in terms of ARPU, in terms of maybe how you would look at this game, how it performed versus an MMO in China. .

Mike, I got, I think, half the question, and I'm going to ask you to repeat the second half. In terms of GTA Online as a financial contributor, this is new and untested so far, and we haven't assumed meaningful revenue. We'd be very grateful if it comes along.

What we're focused on is delivering a terrific experience and remains to be seen what kind of contributor is. So our expectations about profitability in 2015 and forward are not at all related to GTA Online, to be specific.

And your second question was?.

I guess just some sort of engagement metrics.

I mean, do you plan to provide us, moving forward, with any sort of kind of like payor conversion or ARPU? Are those sort of considerations that are going to help us kind of shape what this thing could generate in terms of performance?.

We try to be as transparent as possible. And if we have meaningful contributors to our revenue and profitability, then we aim to provide transparency. So it remains to be seen. Right now, it's not a topic we need to address. .

And then just curious on -- just general engagement overall. I mean, initially, people going in to the online experience, are you seeing it kind of drop off? Is this kind of just continual balancing? And are people actively playing it? Is it growing? Any sort of insight there would be helpful. .

Mike, it's Karl. Like I said before, we're not discussing what the -- specific numbers around engagement at this point. But as I mentioned early in the call, there are many people playing it, the engagement has been very high and the feedback has been extremely positive.

And we couldn't be more pleased where we're sitting right now with this exciting opportunity. I just don't have any specifics to share with you right now. .

Okay. And then for fiscal '15, just thinking, obviously, you expect to be profitable here for a period of time.

Just thinking about fiscal '15, how much is that catalog performance cost control versus having to get new games to the market and outside of maybe the ones that are pretty easy to model? I mean, we're all trying to get an idea of the key drivers for fiscal '15.

I think it's pretty easy to know that NBA and WWE and some of these online experience are going to be contributors, but how much -- how important are the unannounced games in terms of driving performance?.

That's a great question. Our catalog does provide a nice backbone for our business. We have the highest-performing catalog for SKU in the business, and that's driven by our very high Metacritic ratings. Consumers keep buying our titles, and they keep buying the titles even after transitions of platform.

So we remain optimistic about our catalog going forward. And digitally-delivered offerings foot with that, because one of the things that digital distribution does is makes your catalog more available. That said, our plans for '15, in fact, reflect a robust release schedule of next-gen titles. We have said that we have more than 10 in development.

And generally speaking, in order to be -- to deliver the kind of results we hope to deliver and want to deliver, we do need and expect to have new tent-pole releases. .

[Operator Instructions] Our next question comes from the line of Brian Fitzgerald with Jefferies. .

A follow-on to that the last question.

With your impressive catalog library, are there any unique dynamics you see to catalog sales as you roll through a hardware transition? And then on launches like GTA V, what kind of impact or positive pull-through do you see on a GTA catalog with that type of event?.

Brian, it's Karl.

Your first question was about dynamics on catalog in a console transition?.

Yes. .

Is that correct? Okay. .

Yes. .

We haven't really seen a lot of dynamics that we can specifically relate to a console transition in terms of catalog. What we are seeing is catalog, there's -- the amount of digital activity in our catalog is increasing over time, and we stated that in the past.

But to specifically say that this is related to a console transition, we can't really see that at this point.

And the second question, I'm sorry, I apologize again, what was it?.

Just what does GTA V and catalog have to do with one another? The GTA series continues to sell extraordinarily well years and years after its release. I mean, in this past year, we put out the 10th year anniversary edition for GTA III on tablet, and that did great for us. We've talked about that before.

And console transitions don't hurt our catalog particularly. And people keep playing old titles on old consoles that they still have, even when they buy new consoles, if the titles are good enough. There's an element of nostalgia, but only for the best titles.

So we have high hopes for our catalog and now digital distribution, obviously, provides another opportunity. And there are other platforms, whether that's Steam or whether that's any number of other opportunities to release our catalog. .

Mr. Zelnick, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments. .

Well, once again, thank you so much for joining us. I just want to take one last moment to express our gratitude to all of our colleagues all over the world for the extraordinary quarter, outlook for the year, and just how well this company is doing.

We feel like we're firing on all cylinders, and we're grateful to all of our colleagues for making that happen. And thank you for joining us. .

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day..