Henry A. Diamond - Senior Vice President of Investor Relations & Corporate Communications Strauss H. Zelnick - Chairman, Chief Executive Officer, Member of Executive Committee and Member of Special Litigation Committee Karl Slatoff - President Lainie Goldstein - Chief Financial Officer and Principal Accounting Officer.

Andrew E. Crum - Stifel, Nicolaus & Company, Incorporated, Research Division Thomas F. Andrews - BMO Capital Markets Canada Brian Patrick Fitzgerald - Jefferies LLC, Research Division Zachary Arrick Ryan Gee - BofA Merrill Lynch, Research Division.

Greetings, and welcome to the Take-Two Interactive Software First Quarter Fiscal Year 2015 Earnings Conference 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 for Take-Two Interactive.

Thank you, Mr. Diamond, you may begin..

Good afternoon. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the first quarter of fiscal year 2015 ended June 30, 2014. Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie Goldstein, our Chief Financial Officer.

We will be available to answer your questions during the Q&A session following our prepared remarks. Before we begin, I'd like to remind everyone that the statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws.

These forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.

These important factors are described in our filings with the SEC, including the company's annual report on Form 10-K for the fiscal year ended March 31, 2014. 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..

the best creative talent in the business, the strongest portfolio of intellectual property, leading-edge technology and ample cash. We have numerous titles in development, including both groundbreaking new intellectual properties and offerings from our established franchises.

As a result, we're well-positioned to deliver non-GAAP profits every year for the foreseeable future and returns for our shareholders over the long term. I'll now turn the call over to Karl..

Beyond Earth. Heading into this holiday season, we will fully leverage our worldwide marketing and distribution expertise to create must-have moments at retail and also continue to complement our core titles with innovative, digitally-delivered offerings.

Rockstar Games and 2K will roll out campaigns that span all forms of traditional and online media to usher in what we believe is one of our most diverse and strongest lineups ever. In closing, I'd like to join Strauss in thanking all of our colleagues around the world for their contributions in delivering a strong start to the year.

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

Beyond Earth; and catalog sales led by the Grand Theft Auto series. We expect the revenue breakdown from our labels to be roughly 40% from Rockstar Games and 60% from 2K. We expect our geographic revenue split to be about 60% United States and 40% international. We expect gross margins in the mid-40s.

Total operating expenses are expected to increase by approximately 4%, driven primarily by rent for larger studio locations, personnel expense to increase headcount and higher depreciation expense. Selling and marketing expense is expected to be about 17% of net revenue based on the midpoint of our outlook range.

And we project interest and other expense of approximately $9 million, tax expense of about $37 million and weighted average fully-diluted shares of approximately $114 million.

Interest on the convertible notes, net of tax, is approximately $7.4 million, which should be added to net income to calculate net income per share under the if-converted method. As a result of working capital needs, we continue to expect our operations to use a modest amount of cash in fiscal 2015.

However, we expect to generate cash from operations in fiscal 2016 and to be net cash flow positive over these 2 fiscal years. Turning to the second quarter. We expect non-GAAP net revenue to range from $95 million to $110 million and non-GAAP net loss per share to range from $0.60 to $0.70.

Revenue in the second quarter is expected to be driven by Catalog sales, led by the Grand Theft Auto series, NBA 2K14 and Borderlands 2. We expect second quarter gross margins in the low- to mid- 60s due to a higher mix of digitally delivered revenues in the period.

Total operating expenses are expected to decrease by approximately 27%, primarily due to lower marketing expense for Grand Theft Auto V as compared to the second quarter last year. Selling and marketing expense is expected to be about 55% of net revenue based on the mid-point of our outlook range.

Our second quarter outlook also reflects interest and other expense of approximately $2 million, a tax benefit of $2 million and weighted average shares of approximately 80 million. Additional details about our financial outlook are in the press release, reporting our first quarter results which was issued shortly before this call.

In closing, we are pleased that fiscal 2015 is off to a solid start, with better than expected first quarter results.

Our industry-leading creative and intellectual property assets, coupled with an ample reserve of cash, provides Take-Two with a strong foundation to continue to execute our proven strategy and deliver positive results, both this year and over the long-term. 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 colleagues for their hard work. 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 Drew Crum with Stifel..

So want to understand what the impact of moving Evolve from the fall to the February timeframe, it's on revenue guidance. You guys beat your first quarter guidance, but you're reiterating for the full year. So just want to understand what impact that has on how you're thinking about revenue for the year..

We don't give out our guidance on a title-by-title basis. The title did move, but we have a lot of movement in our guidance from this quarter versus when we previously gave out our initial guidance. And we beat Q1, we also adjusted all our estimates for our titles, for our pipeline that's coming out in fiscal '15.

And there were some changes to our release schedule, as we mentioned..

Okay. Fair enough. And then some of your competitors have seen weakness on new releases on past-gen systems. Just want to get a sense as to what you're anticipating for Borderlands, which will not be available on next-gen systems..

Yes. We've definitely seen others' reports, largely on catalog. And I think our view is that if you give consumers what they want, they come out for it. Our catalog sales have done very well, that's what we announced in this quarter, it's one of the key reasons that we were able to beat in the quarter.

And we have a lot of faith in the Borderlands franchise. There's still a huge installed base of consumers. Borderlands is beloved, Borderlands 2 has sold something like 10 million units to date. And so we have very high hopes for the pre-sequel for current gen platforms and, PC, indeed, But.

It'll be reliant on quality and every expect to deliver high-quality games..

And I think one of the differences that we may have from our competitors is this is a fresh new experience that's build for this current gen system, which has not been the case with our competitors.

Particularly the weakness of the competitors have seen is on when you're coming out with both titles on current gen and next-gen and there's not necessarily a distinction between the two..

Got it, okay.

And then one last question and I apologize if I missed this in your remarks, Karl, but is there anything contemplated in the fiscal 2015 guidance with respect to DLC for Grand Theft Auto V?.

We don't have anything in there for Grand Theft Auto V. There may be some free downloadable content that's given out there in the year, but anything that brings revenue to top line hasn't been -- we've got nothing announced today..

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

This is Tom Andrews standing in for Edward tonight. Just a couple of quick questions. One, can you go into a little bit of detail about the revenue breakdown in terms of what was generated from your 2K portfolio versus what was generated by the Rockstar portfolio? And then just one housekeeping item.

Can you go through the individual stock option expense lines for the quarter?.

Yes, we wouldn't normally go through that kind of detail on the call. You can follow-up separately with Hank if you wish and Lainie can respond to the 2K versus Rockstar split in the quarter..

Right. For Q1, Rockstar was approximately 45% and 2K was 55%..

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

When you look at the nice digital revenue you had, plus 43% year-over-year, you mentioned in the release it was driven by GTA, NBA and Borderlands. Could you maybe give us some of the mix there? I know you highlighted GTA virtual currency and NBA, but maybe some color on mix split, including Borderlands.

And then Strauss, you've had great success with NBA 2K. You highlighted the 7 million benchmark. How do you think about entering additional sports categories going forward? And obviously you're doing pretty well with WWE right now..

Yes. We appreciate the question. We don't break out how the titles are doing specifically. And I know people would like that kind of color, but we're still in the middle of exploiting these titles and delivering these fantastic experiences to consumers. So it's still a work in progress. However, we are very pleased with how all of it's going.

Very, very pleased with the current consumer spending in general. Very pleased with virtual currency sales. Very pleased with Grand Theft Auto Online's metrics across the board and very pleased with how NBA 2K is doing. So it's an excellent story across the board. We don't break it out title by title.

In terms of our sports business, thank you for the compliment disguised as a question, happy to have it. And naturally, we're trying to grow the business and we're doing so selectively. What we found is that when we're leader in a space, we do really, really well. We also ran in the space we don't do well.

And one of the things we try to do around here is start from the point of delighting audiences and putting out the highest-quality products and then thinking about making money. But equally, we really, really object to losing money.

The bulk of what we do around here is owned intellectual property, by definition, a sports business is a license property, so we have to be exceedingly selective in our licenses. And the company's had history around that.

So, generally speaking, I think this is a very disciplined, sometimes to a fault, management team and that applies to the sports business. But I don't want that to be confused with the lack of ambition because, indeed, we're very, very ambitious to grow the enterprise..

[Operator Instructions] Our next question comes from the line of Zachary Arrick with Senvest..

Could you tell us the reason for the delay, the pushback in the release date for Evolve?.

Yes, absolutely. We primarily decided that the title deserves and should have more time to be polished so it can reach its absolute optimal state before we release it. And historically, we've always benefited from giving the creative teams more time to polish the titles. We've never regretted it. It's not a meaningful amount of time.

The title's still coming out in the fiscal year. And we're really excited about the title. Coming out of E3, where we won Best of Show, it felt like the right thing to do, to make absolutely sure this title can be its very best. At the same time, I do believe February's a pretty terrific release window.

It's not at all crowded and we will benefit from the fact that there are a lot of holiday sales of consoles, so the installed base will be bigger and it should be pretty open time to release. And if you look at our history over the past 7 years, we're a company that's often released major titles outside of the holiday season.

In fact, we typically are not very active in the traditional holiday season. So having such a robust release schedule for October is somewhat unusual for us. We're really excited about it. But I, for one, am glad that we have Evolve coming in February for any number of reasons..

Our next question comes from the line of Justin Post with Merrill Lynch..

This is Ryan calling in for Justin. Just wanted to go back to GT Online (sic) [GTA Online] real quick.

If you could talk about maybe what's the content that's probably coming out in the next quarter or for the rest of the year that we should maybe keep an eye on? And if you could talk about GT Online (sic) [GTA Online] and what that could be as a piece of that 40% of revenue that'll come from Rockstar this year. And then I have one follow-up..

Yes. We're not really able to give much more color on GTA Online. It's not for want of excitement. We have a great deal of excitement. But when we start getting into content and marketing announcements, that's really driven by the label.

We have said though and I want to reiterate, that the release of GTA Online has been extraordinarily favorable for consumers and for us. We're immensely grateful to Rockstar for the incredible product that they delivered, the incredible consumer experience. And we remain optimistic about what GTA Online can be both for current gen and next-gen..

Okay. That's fair. And then for Lainie maybe.

Can you remind us what you said about the quarterly run rate for the recurring revenue in GT Online (sic) [GTA Online] and whether it's reasonable to expect that, once it comes out on next-gen, if that quarterly run rate should be a step function up or not?.

We didn't give out, specifically, for GTA Online. We did say that 60% of the overall digital came from the recurrent consumer spending. And that includes our virtual currency, add-on content and online games..

So we're not making any projections about the run rate of anything that we've put out before..

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, thank you so much for joining us. Obviously, we're thrilled to have beaten our projected outlook for something like 8 quarters in a row and to reiterate our financial guidance for the year. We have a lot of great things coming up. And we're grateful to the shareholders for their support. Thanks for joining us today..

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..