Greetings, ladies and gentlemen, and welcome to the Take-Two Third Quarter Fiscal 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference being recorded. It is now my pleasure to introduce your host, Mr. Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications for Take-Two. Thank you.

Sir, you may begin. .

Good afternoon. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the third quarter of fiscal year 2014 ended December 31, 2013. Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie Goldstein, our Chief Financial Officer.

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

Before we begin, I'd like to remind everyone that the statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us.

We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.

These important factors are described in our filings with the SEC, including the company's annual report on Form 10-K for the fiscal year ended March 31, 2013 and Form 10-Q for the fiscal quarter ended September 30, 2013..

I'd also like to note that, unless otherwise stated, all numbers we will be discussing today are non-GAAP. Please refer to our earnings release for a GAAP to non-GAAP reconciliation and further explanation. Our earnings release and filings with the SEC may be obtained from our website at www.take2games.com..

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

Thanks, Hank. Good afternoon, and thank you for joining us today. I'm pleased to report that our business continued to thrive during the fiscal third quarter, and we again delivered better-than-expected results.

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

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

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

Upon release, the title shattered entertainment records, selling through $800 million in 24 hours and over $1 billion in only 3 days and it was the best-selling video game of 2013, according to the NPD group..

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

The success of Grand Theft Auto V is only part of Rockstar Games' unparalleled track record. To-date, the label has sold-in nearly 250 million games worldwide across multiple hit series..

2K built upon their legacy of delivering the highest-rated and top-selling basketball video game with their current next-gen releases of NBA 2K14. The title has become the fastest-selling release in history of our NBA 2K franchise, with sell-in to-date of more than 5 million units across console and PC.

I'd like to congratulate the team at Visual Concepts, who simultaneously created 2 outstanding products for current and next-gen platforms..

Our WWE franchise has quickly proven to be a successful addition to our portfolio. Sales of WWE 2K14 have exceeded our expectations, and the title is being supported with add-on content, including the Season Pass, featuring many of fan-favorite WWE superstars and legends.

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

Revenue from digitally-delivered content grew 42% year-over-year to $132.8 million. Nearly half that revenue was derived from recurrent consumer spending, including virtual currency, add-on content and online gaming.

Creating opportunities to drive ongoing engagement with our titles after release is a key strategic focus for our company and is becoming an important driver of additional revenue and profits. It also helps to strengthen our results between frontline releases, while providing additional entertainment to consumers..

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

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

Online play contributed to the success of NBA 2K13, and we're seeing continued growth with this year's release of NBA 2K14. The majority of NBA 2K14 fans are actively engaged in online connected experiences, including multiplayer gaming.

In particular, consumers are buying virtual currency to customize their players with clothing and abilities and are also forming teams with friends to play in online competitions..

Add-on content is also a key component of recurring consumer spending. During the third quarter, we released successful downloadable content for BioShock Infinite, Borderlands 2, Sid Meier's Civilization V and WWE 2K14. .

Borderlands 2 is a prime example of how we're able to generate substantial revenue and profits from add-on content over an extended period. In the 16 months following the title's launch, we released 9 substantial downloadable offerings, dozens of smaller character customizations and we plan to release more downloadable content in the coming months.

This is in addition to package goods, add-on packs and, most recently, a Game of the Year Edition. The popularity of add-on content for Borderlands 2 is an important contributor to the title's becoming the highest selling release in the history of 2K with more than 8.5 million units sold-in to-date..

Our online projects in Asia, particularly NBA 2K Online in China, are also generating growth and recurrent consumer spending and contributing to our results. We'll continue to focus on developing additional offerings to promote engagement with our titles beyond initial release.

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

San Andreas for a variety of mobile platforms, including iOS and Android. Our ability to bring our popular catalog titles to mobile platforms enable us to grow our audience and generate incremental revenue and profits with modest development costs and virtually no marketing spend..

As I've said many times before, being good is simply no longer good enough. To succeed in our industry, one must aspire to and deliver greatness. Our positive momentum over the past year speaks to our focus on consistently delivering hits. I'm particularly proud that Take-Two was the top video game publisher of 2013 according to the NPD group.

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

Turning to our balance sheet. We ended the third quarter with cash of almost $1 billion. We are committed to driving long-term shareholder value, including by returning capital to our investors. To that end, we repurchased $277 million of our stock during the third quarter.

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

As a result of our better-than-expected third-quarter results, we're increasing our full year outlook for fiscal 2014, which is poised to be a record year for our company. We projected non-GAAP net revenue of nearly $2.4 billion and earnings of more than $4 per share..

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

We believe that the initial success of Xbox One and PlayStation 4 bodes well for our industry and foreshadows what promises to be a vibrant hardware cycle. In addition to capitalizing on these new consoles, we're continuing to invest prudently in emerging platforms and business models that complement our core focus..

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

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

I will now turn the call over to Karl. .

Thanks, Strauss. Today, I'll provide an update on our development pipeline. With Grand Theft Auto V, Rockstar Games has redefined the term blockbuster not just for gaming but also for the entire entertainment industry.

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

In addition to new Gameplay and in-game items released by Rockstar Games, the creator tools enabled players to enhance their game play experience by developing their own content. Through this functionality, the player community has already created and published over 2 million death matches and races.

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

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

Enemy Unknown from Firaxis Games, 2K will launch complete editions for each title for the PC. Featuring the full game plus all previously released add-on content, these editions represent a terrific value for consumers and another example of how we extend the lives of our franchises over time. .

Skyrim and BioShock Infinite bundle, each available for the Xbox 360, PS3 and PC..

Burial at Sea Part 2, the second add-on campaign set in the underwater city of Rapture before its fall. .

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

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

Evolve, which will be available this fall for Xbox One, PlayStation 4 and PC, expertly blends cooperative and competitive multiplayer experiences as a team of 4 hunters face off against a player-controlled monster. Set on a futuristic deadly alien planet, gamers hunt their prey in adrenaline-pumping 4-versus-1 matches.

Players will experience Evolve as either a first-person shooter when playing cooperatively with the 4 hunters or in the third person when playing as the monster, providing unique Gameplay experience. .

2K has kicked off the pre-order campaign for Evolve, featuring the Monster Expansion Pack, which includes the Savage Goliath skin at launch and the new monster character as soon as it becomes available after the game's released. .

In addition, during fiscal 2015, consumers can look forward to exciting next-generation releases from our NBA 2K and WWE franchises, as well as other unannounced titles that promise to raise the bar for excellence. We'll have more to share about our titles in development throughout the next several months as we head into E3. .

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

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

In closing, I'd like to join Strauss in thanking all of our colleagues for their contributions to our continued success. I'll now turn the call over to Lainie. .

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

All of the numbers I'll be providing today are non-GAAP results from continuing operations and all comparisons are year-over-year unless otherwise stated. Our press release provides a reconciliation of our GAAP to non-GAAP measurements. .

Starting with our results for the fiscal third quarter. Net revenue increased 90% to $767.7 million. This exceeded our outlook range of $650 million to $700 million due primarily to the continued success of Grand Theft Auto V, the record-breaking launch of NBA 2K14 and the strong performance of Grand Theft Auto Online. .

Revenue from digitally-delivered content grew 42% year-over-year and accounted for $132.8 million of net revenue. The largest contributors were the Grand Theft Auto series, the NBA 2K franchise and offerings for Borderlands 2 and BioShock Infinite..

Enemy Unknown, BioShock Infinite and Civilization V. .

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

Operating expenses were approximately $127 million, up by about $60 million due primarily to higher marketing expenses to support our third quarter releases, continued marketing spend for Grand Theft Auto V and higher personnel expenses due to our increased headcount. .

Interest and other expense was $0.7 million. And non-GAAP net income was $210.7 million or $1.70 per share as compared to $78.8 million or $0.67 per share in fiscal third quarter 2013. This exceeded our outlook range of $1.20 to $1.35 per share due primarily to our better-than-expected results from operations..

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

Turning to some key items from our balance sheet. At December 31, 2013 as compared to September 30, 2013, our cash balance increased to $972.2 million. Our accounts receivable balance decreased to $189.5 million, primarily reflecting collection of receivables associated with the launch of Grand Theft Auto V near the end of the second quarter. .

Inventory decreased to $45 million, primarily due to the launch of NBA 2K14 in early October and shipments for replenishment orders of Grand Theft Auto V. .

And software development costs and licenses decreased to $193.8 million, reflecting the amortization of development costs for our fiscal 2014 releases. .

Now we'll review our financial outlook for the full year and fourth quarter fiscal 2014, which is all provided on a non-GAAP basis. We're increasing our financial outlook for fiscal 2014, primarily to reflect our strong third quarter results and lower share count due to our repurchase of 16.24 million shares in November.

We now expect non-GAAP net revenue to range from $2.35 -- $2.35 billion to $2.38 billion and non-GAAP net income to range from $4.15 per share to $4.25 per share. These would be record results for our company..

Turning to the details of our full year outlook. We expect the revenue breakdown from our labels to be roughly 70% from Rockstar Games and 30% from 2K. We expect the geographic revenue split to be about 50% United States and 50% international. We expect gross margins in the low 40s.

Total operating expenses are expected to remain approximately flat from the prior year. Selling and marketing expense is expected to be about 10% of net revenue based on the midpoint of our outlook range.

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

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

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

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

We expect fourth quarter gross margins in the low 50s. Total operating expenses are expected to decrease by approximately 16% [ph] from the prior year's fourth quarter, driven primarily by lower selling and marketing expense. Selling and marketing expense is expected to be about 16% [ph] of net revenue based on the midpoint of our outlook range. .

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

This reflects weighted average basic shares of approximately 77 million, 12 million participating shares for our unvested stock-based compensation awards and 26 million shares representing the potential dilution from our convertible notes under the "if-converted" method of accounting. .

To-date, Take-Two stands on its strongest financial foundation in the history of our company. This was achieved through our ability to balance leading-edge creative endeavors with a disciplined approach to capital investment.

We are confident that our continued focus will enable Take-Two to deliver profits and returns for our shareholders over the long term. Of course, none of this would be possible without the hard work of our entire team, who I'd like to thank for their dedication to the company. Thank you. 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 associates for their ongoing commitment to excellence. To our shareholders, I want 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. .

Can you talk a little bit about -- or, kind of, remind us what you said about the GTA Online usage? I think you said 70% of the people who are online connected have played online, repeat that.

And then, what are people doing in there and paying for so far? And what's your outlook going forward?.

Justin, it's Karl. We've got -- what we said is, there's 70% of the folks who are playing -- have played the game with an Internet connection have played 2K Online. .

Okay.

And those that are paying, what are they paying for currently and how do you see the opportunity going forward?.

Well, first of all, we're very optimistic we'll have the opportunity. Things are going very well, and we're very happy with the -- with how things are going in GTA Online. A lots of great content out there already and a lot of great content on its way. So we are -- we obviously have a great -- a very positive outlook for the future.

In terms of what they're doing online, I would have expected that you would have played it by now. But otherwise, there are a lot of different ways that you can enjoy the content online. There are pre-determined death matches, the -- your standard death match, your races. In terms of buying, we have the GTA cash packs.

So in order to experience some of the game, you can buy cash packs and that allows you to unlock to certain content, items that you can buy, et cetera. So it's a standard online transaction model that you would see. .

Okay. Great.

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

We don't really distinguish between mobile and nonmobile. Our view is that a platform that a consumer wants to use to experience the best interactive entertainment is good for us.

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

If you believe in Moore's Law and I do, then you believe that tablets will be tantamount to PCs pretty soon and I have every reason to believe that if that's where people want to consume video games, that's where we'll be. .

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

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

Do you think that you've made up for any sort of lost revenue? And can you just take us through the timing of that, when that went sort of back online? Was that towards the end of the quarter? And is there maybe some catch-up to happen here in the March quarter?.

Yes. I mean, I've made it plain that we have been learning as we go along in this area, and our primary goal is to delight consumers and create a great experience. As you know, GTA Online is a free-to-play experience, and there's opportunities for recurrent consumer spending within the game, no obligation, of course.

But we've sold-in 32.5 million units of Grand Theft Auto V. We've enjoyed an extraordinary economic result. But the starting point for that economic result is delighting consumers, giving them a fantastic experience and that's our focus in GTA Online.

And the reason that we offer an opportunity to spend money in the game is that's coordinated with a great experience. We're not making decisions in order to extract value, we're making decisions to delight consumers and that includes creating value. Yes, we had some issues with the currency.

Those issues have been addressed, and we're not really focused on whether there's a catch-up or anything of the sort. As long as people keep loving GTA Online, it's going to be great for us. .

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

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

James, it's -- I'm so thrilled to be asked to answer how high is up question because it's sort of novel for us around here. Look, we're thrilled. We're just thrilled, and we know we certainly are following metrics very carefully and we're growing our expertise everyday.

But we made it plain that we prefer to expend resources after we see revenues, not before. It's protected us greatly. We are very disciplined, and that means we are learning as we go. But the watchword here is about delighting consumers and keeping them engaged, not about monetization. The monetization comes with the engagement.

My own view is, I feel very, very optimistic about GTA Online and I think there's plenty more opportunity and we've made no bones about the fact that we have expectations for GTA Online in the fourth quarter, for example. So clearly, we have expectations going forward, but we're not at a point yet where we want to share the metrics. .

Very helpful. And I guess, just last question, Strauss. I mean, the performance of your company over the past 6 months, certainly, since GTA has come out, has been through the roof. Hopefully, tomorrow will be a different story. But your stock has been essentially sideways over that time. I guess, you'd be surprised that your stock hasn't done more.

It seems like you've gotten out a lot more and talked to investors. What would they like to see to reward your shares more commensurately with your performance? And I guess, are there 2 ways to skin this cat? I mean, you're sitting here with cash that represents half the market cap of your company.

What's on tap? What could you potentially do to get people more excited about the shares just given your cash position?.

We -- I've never met a CEO who didn't think his or her stock was undervalued, and we're not in the business of pumping stock. We're in the business of trying to be the most creative, the most innovative and the most efficient entertainment company that exists.

And I'm really proud of it in the last several years, every year, we've launched a new multimillion unit selling franchise. I'm really proud that we have the best collection of owned intellectual property in the business.

I'm incredibly gratified that I believe we have the top collection of creative talent within our 4 walls and that they seem to be happy to work here and, moreover, that they love following their passions. And that -- the collection of that strategy and that execution, as Lainie said, has yielded an extraordinary financial result.

And we sit here today, once again, beating our guidance for the sixth quarter in a row, once again increasing our outlook now to $4.15 to $4.25 a share. I sit here with the ability to say in confidence that we expect to be profitable in the next fiscal year on a non-GAAP basis and profitable on an ongoing basis for the foreseeable future.

And finally, we have nearly $1 billion in cash. And based on the way we account for our convert, one could argue that from the context of no debt, since we account for our converted notes returned in equity. That's an amazing place to be in what is a relatively short time since we came to this party. And we're immensely grateful for it.

What do I surmise? I mean, look, sometimes, the market takes a long time to come to a view of where we are and where we're going.

And once I asked one of our very sophisticated investors why the stock had gone down and he said to me, "More sellers than buyers." So I'm convinced that if we keep executing on this vision and our entire team stays focused on what they're passionate about and we all work really, really hard, I'm convinced that there will be a narrowing gap between our reality and how the market sees us.

.

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

A couple of questions for you. With regards to GTA Online, you said 70% who have played with Internet connection have played GTA Online.

Just curious, what percentage of that 70% are you -- have actually been monetized with some type of microtransaction? And then, secondly, with regards to your balance sheet, let's -- if you just look at it from a net cash perspective and let's treat the converts as debt, you've got over $500 million of cash.

Is there a certain amount of cash that you want on hand at all time for operational purposes? And when I look -- it looks like you really didn't buy back any more stock after the announcement that you made in late November about repurchasing the Icahn shares and then 4-point [ph] some odd million shares in the open market.

Have you bought any since that time?.

Yes. We're not talking about the percent that have monetized. We're not disclosing those metrics, and that's primarily because they're still a work in progress.

In terms of the balance sheet, there absolutely is a based amount of cash on hand in the several hundred million dollar range to make sure that we can continue to make and market the highest quality products without regard to the fact that now and things don't go our way.

We're very fortunate that we've been profitable a lot lately and we've been able to be profitable in multiple years without a frontline release of Grand Theft Auto, and that was our stated strategy. And of course, when we do have a frontline release of Grand Theft Auto, we've been very fortunate with those results as well.

So it's been a lot of good news around here. But not everything always goes our way. We have had disappointing releases, and we are a pure play entertainment company and there's an element of volatility baked into that.

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

And we're -- I'm fond of saying, you've heard me say it before, arrogance is the enemy of continued success. We don't take anything for granted. We don't claim continued success as a matter of right.

Our team -- honestly, when I talk to our creative folks about how wonderful our Metacritic rating was or how great something went, inevitably, what they explain to me is not how great they are. But first, they tell me that it was the team's responsibility, not theirs. They disclaim responsibility because that's our culture.

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

And it's that culture that I think protects us -- but even so, now and then we get things wrong and we need to be protected so our team can always feel safe in investing behind their passions and can feel safe in marketing our products in the highest class way possible.

In terms of capital in excess of that amount, and I think we agree we have that now, we do have some converts out there. It's nice to have some flexibility in terms of redemption, even though we account for them as though they'll be redeemed in equity. And we have purchased $277 million of stock.

And, no, we have no new announcements on that since those purchases. And we've made no bones about the fact that we'd be very interested in highly accretive M&A. And let me emphasize highly accretive. And by that, I do not meet speculatively, so I mean actually. So there, we'll continue to grow organically in a disciplined way.

We are -- given that we are in a high-risk business, we are very focused on risk mitigation. We are focused on, in a measured way, looking for strategic opportunities to grow inorganically and we absolutely have our eyes wide open about returning more capital to the shareholders. .

Okay. And then, just one quick follow-up question.

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

It is a general focus. We haven't given out more color because the numbers are all over the place. As you'd imagine, it sounds sort of obvious, but it's worth mentioning. The more successful the original release, the more successful the downloadable content, the more important recurrent consumer spending becomes for the title. .

Our next question comes from the line of Mike Olson with Piper Jaffray. .

I just had one quick one here. On Evolve, you provided some details on the game.

But can you maybe give us some idea if this is really going to become the one big non-recurring title that you plan to launch in 2014?.

I'm sorry.

What do you mean by non-recurring title?.

As in like NBA 2K as an annual title?.

Oh, I see. Well, we -- like we said before, we've announced that we've got unannounced titles in development at this point. We haven't given any other disclosure, but that -- obviously, that is one large that one that we've announced for the year. But other than that, we've got nothing more to say. .

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

Two questions, if I might.

One, if you look across the cycle that's pretty much just done, although GTA is keeping the current cycle going for those gamers, what percentage of your revenues over the course of the last cycle came from GTA? And given -- compared to the last cycle when you didn't have a BioShock or Borderlands and didn't have a successful -- a Red Dead, can you kind of give us a scale of how that distribution changed cycle-to-cycle and where it might go in the new one? And then, secondly, Strauss, relative to your comments on making accretive M&A, if you look over the last 4 or 5 years, there's been a lot of M&A in video game land, and I think most people would agree that not a lot of it has been accretive, at least, not for very long.

As you look at opportunities and given your experience in broader media, would a deal have to be in video games itself or might you look to broaden the scope of what take Take-Two does in terms of the mediums it serves?.

Yes. We don't have the numbers in front of us in sort of comparing this launch and our other titles to the last launch GTA IV and other titles. It will be very hard to do that apples-to-apples because, obviously, it's not as though we have all the release schedules of all the titles in lockstep.

We do have a lot more big franchises today than we had when we launched GTA IV, and we're very grateful for that because, as I said, we launched at least 1 new intellectual property that sold millions of units every year since 2007, I believe. So I think you can safely assume that the percentage is lower now than it was before.

But beyond that, I don't think we can give much color. In terms of M&A, look, you're 100% right. The track record of the industry is not wonderful, although Activision has done some very clever transactions I would argue and their stock price reflects that.

But across the board, it hasn't been a pretty story, and we just don't believe in pie in the sky. We barely believe pie right in front of us unless we're eating it. So I think the answer is, strategy really matters, execution may matter more than strategy.

And would we contemplate other forms of digital entertainment in addition to pure video game entertainment? We would contemplate that. But beyond that, we don't have much else to say now and certainly nothing to announce. .

Our next question comes from the line of Colin Sebastian with Robert W. Baird & Company. .

First off, if you can provide any perspective on the efforts required to bring a franchise like GTA V over onto other platforms, if that's more or less a traditional port or does Rockstar have somewhat higher standards that require something more in-depth in terms of extensions? And then, on the digital strategy, I know as a content company, you have to decide how much infrastructure and servers and networking to build yourselves versus relying on others -- in your case like Sony and Microsoft.

So my question is, looking ahead based on your experiences to-date, do your platform partners have those pieces to serve your content as you'd like to your customers? Or do you foresee any need to build any additional infrastructure to support your particular online initiatives?.

We're going to leave it to our labels to talk about what happens with their properties going forward. We think that's -- I know, at times, on these calls, people would like me to talk much more about upcoming releases and sometimes there's some frustration that we don't.

The truth is, though, we're trying to provide as much transparency as we can to our shareholders and leave the marketing decisions and the marketing announcements to our labels because that's the way we maximize our sales. So once again, Rockstar will make appropriate announcements about their releases as they come, as will 2K.

And as they make those announcements then of course we'll reference them here, but let me emphasize that we feel very optimistic about our outlook going forward and very encouraged by the results we've had to-date. In terms of infrastructure, look, the world is going to resources that are outsourced and cloud computing, and that's hardly a secret.

And we have 0 interest in building out massive facilities and expending a great deal of money on CapEx. I don't expect that we'll see very significant CapEx investment.

I think the bulk of our needs will be handled by third parties, whether that's our hardware partners or other third parties that help provide the capacity to have us meet consumers where they are. But, no, we're not building call centers, data centers or server farms. .

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

First one for Lainie. Lainie, cash and accounts receivable at $1.2 billion, accrued expenses at about $600 million, I assume most of that are the internal royalties. What does that look like by the end of the fiscal year? Because I'm basically just trying to get a sense of really what the net cash looks like.

And then if you talk about -- are you going to be cash flow positive for '15? And then, Strauss or Karl, just in general, do you expect any meaningful changes in the overall business model with Microsoft and Sony this gen? Or will the business model really basically look like last gen?.

For the cash flow for the remainder of this year, we see that we'll be cash flow neutral. We're not giving out guidance for '15 yet, so we're not giving our cash flow expectation for that period either.

Overall, the balance sheet also, we don't give out projections on the balance sheet, but it should be in line with how the P&L flows for the next quarter. .

And, Ben, it's Karl. First of all, we are thrilled with the launch of the next-gen consoles. We're very, very excited about how things are going right now, as I know Microsoft and Sony are. In terms of changes in business models between us, I don't anticipate anything meaningful at all. .

And if I can [ph] follow-up with one, maybe for Strauss.

Assuming that Google, Amazon and Apple continue to press forward with their digital media initiatives and very likely that they'll have their own box as they get more content for television screens, how does that impact how you think about the business?.

It's all good news because more distribution to consumers on a multiplicity of devices is a good thing, and we have reason to believe that it's going to be easier and easier to develop in a way that we can be readily available without too much porting expense across the multiplicity of platforms.

If it costs money to port and of course it does, then we have to make an economic decision based on who we think we're going to find at the other end, and that's a balancing act. We have invested heavily behind both Microsoft and Sony. It looks like, as Karl said, that's going to pay off and is beginning to pay off. We're thrilled about that.

But our goal is to be where the consumer is and to be utterly ecumenical about other people's platforms as long as the economic model is reasonable. So I think the answer is, we intend to be everywhere. .

Our next question comes from the line of Drew Crum with Stifel, Nicolaus. .

So I noticed that Evolve has not been announced for old gen systems. And I think, in your prepared remarks, you noted the NBA 2K and WWE 2K would be available on new gen. Is that any indication as to your plans to support old gen going forward? And then, the second question pertains to GTA V.

There's been a lot of scuttlebutt or speculation that it will be available on PC shortly.

Not asking for a forecast on that, but can you give us some context history with GTA prior titles on the PC?.

It's Karl. In terms of the old gen versus new gen question, I would say that any of our announcements that we've made to-date don't necessarily reflect our plans.

Whether something is going to be specifically for next gen or old gen, it really is more a function of what we've announced that -- what platforms we've announced that they're going to be on at this point.

So we haven't really -- we haven't said anything about Evolve, but for next gen platforms, we haven't said anything about our NBA titles, but for next gen platforms -- or sports titles, but for next gen platforms. But that doesn't necessarily mean that we're not going on current gen, as we are going on current gen. It's not related at this point.

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

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

Correct, yes. .

Yes, yes. At this point, we -- there's really nothing for us to say about that. We haven't announced anything as it relates to any other platforms versus what's out there. .

Okay. Karl, just trying to get a sense as to how it's performed on PC with prior durations, not -- again, not asking for a release date... .

You're talking about GTA IV?.

Correct. .

Yes, it's been a very strong PC title. .

Our next question comes from the line of Neil Doshi with CRT Capital. .

56% of your revenue came from international this quarter. I think it's the highest we've seen in years.

Can you provide any color as to what drove that strong international sales and how material was NBA 2K China? And then, on GTA Online, any thoughts on eventually making that a mobile opportunity just in order to keep people engaged in the franchise when they're away from their consoles or big screens?.

Yes. The average selling price translated into U.S. dollars is higher outside the U.S. than inside the U.S. So we'd certainly benefit from that. We also benefit from our strategy to make sure that our international distribution is very strong worldwide.

Years ago, we made a big push into Asia, built our headquarters in Singapore and we're reaping the benefits of that. And obviously, with the sales of GTA V, we're seeing a benefit internationally. We also have seen a lot of growth from Latin America, and we're pleased with that.

So we continue to focus on building our international business, and these results are very gratifying. In terms of mobile opportunities, again, we don't really distinguish between mobile and fixed. We don't distinguish between tablet and PC. We don't distinguish between console and PC and tablet.

We do distinguish between screen size, small, medium and large, because they accommodate different experiences. And we have our own limitations based on a platforms' technical ability to serve our needs and consumers' needs. But beyond that, we're utterly ecumenical.

And with regard specifically to GTA, I'm sorry, we said it before, we're not talking about other releases yet. And we're going to leave it to Rockstar to have those discussions. .

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

Just curious on mobile, Strauss, and it feels like there's a lot of value-creation opportunity there for you. I know you've kind of experimented with premium, I think, successfully. But it feels like kind of free-to-play is the answer here. You're definitely seeing some games achieve some tremendous at best [ph] In the market and I think more to come.

Also, it seems like you're a big bull there. So in just thinking about kind of your IP cash, the development of talent that you have and maybe that you acquire seems like a no-brainer here to be more aggressive on the mobile side.

So I was just hoping if you can kind of share with us your strategic vision on how you see mobile and how impactful it can be for you in the future. .

Well, I don't want to confuse mobile with free-to-play model because you could have -- in China, you have a free-to-play model on PCs, obviously, which are largely wired. Certainly, free-to-play is a relatively common model for iPad and smartphone, but there's also a pay-to-play model on iPad and smartphone.

So I don't think mobile is the difference that makes a difference. I think the business model shifts depending on the geography, depending on the title, depending on what a consumer wants. So we sold GTA V for -- as a packaged good. We sold it as a digitally-downloadable title.

We've made GTA Online available free-to-play, and there's an opportunity to spend money inside the game. For NBA 2K China Online, it's free to play and there's an opportunity to spend money within the game. So our business model reflects the title, the geography and what consumers want. Whether it's mobile or wired, is of no consequence. .

I mean, mobile appears to be a hyper-growth market and is it something that you plan to put more resources toward? I mean, I think part of the problem of the evaluation is that on a lot of people's minds, they're still stuck to the console and I think for the most part, the majority of performance is console-driven.

But you look at the trends that are shaping our future, mobile is a big part of them. So do you expect to put more resources there? I mean, is this something that you look for in M&A? Any other thoughts would be appreciated. .

Again, I don't -- I think I view mobile differently than you do, Mike, because the content isn't mobile, the content can be anywhere.

The question is, how heavy is it? What kind of processing power is required for the graphics and the game play? And right now, we don't have the ability to take a game that we put on current -- what is now current-gen consoles and put it onto an iPad because an iPad doesn't have the processing power to allow that. But I'm a believer that it will.

And when it does, I have every reason to believe that we'll support that with current releases because that's history of what we've done. Right now, we're putting up some of our older titles on iPad and other form -- other tablets because they support the titles, and we're able to delight consumers and make money as we do it.

I'm a big bull on where mobile platforms are going, and I think they're great entertainment platforms. If they can support what we do creatively, then we'll be there. And if they can't, then we have to wait until they can. If you're asking can we create experiences specifically for mobile? We've done that as well with limited success, frankly.

So if what you're saying is you think that we ought to be more tuned to companies that create lighter experience specifically for what current mobile platforms can do. For example, Zynga just bought a company, NaturalMotion, that does that. They do what some people call mid-core experiences.

And I have no quarrel with NaturalMotion or with the strategy. But I think the answer is, from our point of view, is there an opportunity that makes sense to do that and does it fit with our DNA? And I know so far the stuff that we -- the bespoke [ph] stuff that we've done for these lighter platforms has had -- has enjoyed limited success. .

Fair enough. Last question, if I can.

The kind of perception -- at least my perception that as you have these next-gen early adopters and obviously, it's been a big success here initially out of the gate that maybe they're leaving the online play experience in GTA as they upgrade the console experience and maybe that impact is not as significant right now because there's really a lack of quality content.

But are you seeing -- and I know you're hesitant to share engagement.

But I mean, is that reasonable to expect that as people upgrade that they're not playing on prior gen machines?.

Look, we were selling PS2 products until very recently. If you have great quality titles, it's remarkable how long people will continue to consume them.

I know some of our competitors have expressed that they've seen a big falloff in what is now old gen catalog, but we've made it plain that we haven't seen such a falloff and that's reflected in our very strong third quarter results, where our catalog performed as well.

So I think you're right, as these new platforms gain momentum, we hope they will, software is made available for them, a lot of consumers will turn their attention to that. And that's why we have more than 10 titles in development for these new platforms and why we're so very enthusiastic and optimistic about our future.

Equally, we remain very enthusiastic about our catalog, which continues to sell more units per SKU than anyone else's catalog over time. Why is that? Because we have the highest-quality in the business, according to Metacritic, for the past 5 years. And we don't rest on our laurels. We know that's the past 5 years.

We got to do it every day, and we take that mission very seriously indeed. .

Our next question comes from the line of Edward Williams with BMO Capital Markets. .

Just a couple of, first of all, some quick questions.

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

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

Okay.

And then, how much of your cash is onshore?.

60% is in the U.S. and 40% is international. .

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

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

Okay.

And then, Strauss, just to look at your kind of perspective that you should be maintaining profitability in fiscal year '15 and beyond, can you comment a little bit about what's driving that view? Is it your kind of knowledge about cost control in that time period? Is it your visibility around revenue? Kind of, what's driving that comfort level at this point?.

Well, as you'd imagine, it's our pipeline in development, our anticipated release schedule, the cost related to development, the cost related to marketing and the expectations of performance within a range.

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

Okay. And then, your thoughts about the kind of transition that we're seeing right now. Obviously, you've commented that you're pretty enthusiastic about the adoption rate of the new consoles.

But what's your perspective about the health of the retailers and kind of the retailer inventory levels?.

We haven't had any issues with our retailers at all. They remain our most important channel partner. And there were some issues in the U.K. some time ago, but it's been a relatively robust and quiet marketplace. .

Our next question comes from the line of Brian Fitzgerald with Jefferies. .

Following the same line of questioning on the next gen consoles, can you give us a sense of the percentage of users that are downloading full games versus buying at retail? And then, current gen versus next gen, are you seeing any behavioral differences in terms of engagement or tie-ratios or willingness to download DLC, et cetera?.

It's -- Brian, it's too early for us to have a view on that because, remember, there's a relatively small population of what is now this new generation of consoles out there, and we wouldn't seek to make those comparisons yet. But in any case we don't run our business based on that data, it doesn't tell us anything.

We can know a tie-ratio, but it doesn't change our behavior. .

Okay. And then, really quickly.

It's going to be early, too, but any early impacts or signals you're seeing from demand in China from the console standpoint?.

Way too early to say. I mean, there are no consoles launched there. .

Our next question comes from the line of Doug Creutz with Cowen and Company. .

Just a pretty quick one. You mentioned you have a lot of story-based GTA V content in development.

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

Yes. We haven't given any color on that. .

Our next question is from the line of Larry Haverty with GAMCO Investors. .

It seems to me the market -- looking at the way the stock is acting, the market is penalizing you for these converts and they're kind of extraordinary instruments. Could you walk through when they are able to be converted and the conversion price at this point? And then, I have a follow-up on that. .

The first convert that we have in the market is the $250 million line [ph] matures on December 2016; and the second one, $287 million, matures in July of 2018. .

And what's -- what are the coupons on those right now?.

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

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

And that would seem to me to be an extraordinarily good trade because the way the accounting is, it's very hard for someone to economically figure out whether the share count is 84 million or 125 million. It's a huge gap between actual shares outstanding in the quarter and the potential dilution using the "if-converted" method.

And I think it's wreaking havoc on the way investors are valuing your stock. And the idea that these converts have an economic purpose given the cash position and efficient capital allocation, I think, is a bit presumptuous.

Could you discuss these issues?.

We have -- there are obviously limitations in our ability to redeem before a certain period of time that's built into the indenture, as you know, Larry. But we do back out the number of shares, I think Lainie quoted 26 million of shares [indiscernible] tied to it. So you can easily back that out of the weighted average shares and... .

Right, and also, you had asked -- sorry, the coupon on them is 1.75% on the first one and 1% on the second one. .

They were highly efficient capital instruments when we launched them, and I greatly respect your view of the market and how the market sees the converts. I think they still represent a very positive source of capital to the company.

But in any case, they're rather low-coupon instruments with rather high -- in the case of the second one -- strike prices compared to the current market price in the case of the second one. And of course, when we launched the first convert, it was significantly higher than the stock price at the time.

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

[indiscernible] in the open market though, right?.

I suppose we have the ability to -- that's one other -- that's a way that we could return cash to shareholders. .

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

I just want to thank you, all, for joining us today. We're exceedingly pleased with our results and immensely grateful to our shareholders and, of course, are primarily grateful to all of our colleagues all over the world who once again have hit it out of the park. Thank you very much. .

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..