Greetings, and welcome to the Take-Two Interactive First Quarter Fiscal Year 2016 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. .

It is now my pleasure to introduce your host, Mr. Hank Diamond. Sir, 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 2016 ended June 30, 2015. 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, 2015, including the risks summarized in the section entitled Risk Factors..

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 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 during the first quarter, we delivered strong revenue and earnings growth, driven by robust demand for our recent releases and catalog as well as better-than-forecasted recurrent consumer spending.

Our solid earnings converted into significant cash flow, and at quarter end, we had approximately $1.2 billion in cash and short-term investments. .

Nearly 2 years after its record-shattering launch, Grand Theft Auto V continues to outperform expectations. On April 14, Rockstar Games brought this groundbreaking title to PC with a number of enhancements, generating stellar reviews and strong digitally-delivered sales.

In addition, we've benefited from ongoing demand for the console versions of Grand Theft Auto V, particularly as the installed bases of PlayStation 4 and Xbox One expand. To date, Grand Theft Auto V has sold-in more than 54 million units worldwide.

And Rockstar Games is successfully driving engagement with the title and meaningful incremental profits through the release of new content for Grand Theft Auto Online, which I'll discuss shortly..

NBA 2K15 continues to broaden its global audience and build on the franchise's trend of annual growth. Sell-in of the title has crossed the 7 million unit mark and surpassed NBA 2K14 during the same period after launch.

And NBA 2K15 has generated substantial revenue growth over last year's release, driven in part by high-margin recurrent consumer spending. Our first quarter results were also enhanced by a diverse array of other recent releases and catalog titles. Standouts include the Borderlands series, particularly The Handsome Collection; WWE 2K15; and Evolve..

We continue to capitalize on our industry's transition towards digital distribution. During the first quarter, our digitally delivered revenue increased 139% to $254 million and represented 69% of our total net revenue. This result was driven by growth in full game downloads and recurrent consumer spending, both of which exceeded our outlook.

Recurrent consumer spending represented a significant component of our overall business mix, accounting for 25% of our total net revenue in the first quarter. .

Grand Theft Auto Online was once again the single largest contributor as Rockstar Games has driven sustained engagement through the ongoing release of free content updates, most recently The Ill-Gotten Gains Updates Part 1 and Part 2, which were launched in June and July, respectively.

Roughly 70% of Internet-connected Grand Theft Auto V users have played Grand Theft Auto Online, and the active user base continues to grow, with average monthly active users for calendar 2015 to date up more than 40% versus calendar 2014. .

In addition, virtual currency for NBA 2K was an important part of our digitally delivered success. Revenues grew by 54% year-over-year, benefiting both from online console play and strong engagement with the MyNBA 2K15 companion app. Downloadable add-on content is also a key element of recurrent consumer spending.

The leading contributors in the first quarter were offerings for the Borderlands series and Evolve..

Finally, our results benefited from the enduring popularity of WWE SuperCard, which has been downloaded more than 7.5 million times, and sustained growth from NBA 2K Online in China, which now has 27 million registered users and continues to be the #1 PC online sports title in China.

Expanding our revenue from recurrent consumer spending is a key strategic focus for our organization and an important high-margin growth opportunity. We now anticipate that revenue from recurrent consumer spending will grow in fiscal 2016 and represent an increased percentage of our total business mix versus last year..

Fiscal 2016 is off to a solid start and promises to be another year of substantial non-GAAP earnings and positive cash flow for Take-Two. Our ability to project significant profits this year with a lighter release schedule reflects that our company is now structurally a higher-margin enterprise than at any time in our history.

Today, Take-Two is a global interactive entertainment leader with the industry's top creative talent, a diverse portfolio of critically acclaimed and commercially-successful franchises and a solid financial foundation.

We're better positioned than ever to deliver growth and margin expansion in future years and returns for our shareholders over the long term..

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

Thanks, Strauss. Today, I'll discuss our pipeline for the remainder of fiscal 2016 and beyond. On September 29, 2K will continue their illustrious basketball legacy with the launch of NBA 2K16.

This year's release will define the ultimate intersection of sports and pop culture with 3 unique game covers featuring NBA All-Stars Stephen Curry, James Harden and Anthony Davis as well as an all-new MyCAREER mode written and directed by acclaimed filmmaker, Spike Lee.

NBA 2K16 will also feature the most extensive soundtrack in NBA 2K history, including more than 50 tracks by notable artists, such as The Ramones, Nas, Jay-Z, M.I.A., Calvin Harris and Drake..

On October 27, 2K will release WWE 2K16, which will further leverage the development expertise of Visual Concepts and promises to take this beloved sports entertainment franchise to exciting new heights. Stone Cold Steve Austin, a 2009 WWE Hall of Fame inductee and winner of 21 championships throughout his career, will be the cover superstar..

Judgment Day to compete in the squared circle against the game's roster of WWE superstars..

Enemy Unknown. Developed by Firaxis Games, XCOM 2 introduced procedurally generated maps for deep replayability and will offer higher level of modding support. XCOM 2 will include a diverse collection of new enemies, aliens and weapons and will provide greater story, strategy and tactically-driven combat.

This month, the title will be on the cover of PC Gamer magazine, which features an all-new detailed look at the game and interviews with the development team..

Also in development for Firaxis Games is Sid Meier's Civilization Beyond Earth - Rising Tide, a thrilling, in-depth extension pack from the hit franchise that has sold-in over 31 million units worldwide.

Rising Tide extends Beyond Earth to new frontiers on the planet's surface and beneath the seas, adding even more choices and diplomatic options as players continue to build a new vision for the future of humanity. 2K plans to launch the title this fall..

Fans of Firaxis Games can also look forward to the second annual Firaxicon, an event celebrating the studio's games and players, which will be held at the Baltimore Convention Center on October 3.

Firaxicon will provide consumers with an opportunity to meet members of the development team, attend panel discussions and experience both Rising Tide and XCOM 2 prior to the releases..

On February 9, the release of Battleborn promises to continue our proven track record of launching successful new intellectual properties. Currently in development by Borderlands creators, Gearbox Software, Battleborn is a first-person shooter with 25 unique characters that grow and level up as players progress through the game.

Battleborn will include a cooperative story mode, featuring a variety of heroic adventures as well as 3 different competitive multiplayer modes full of intense online team-based action. 2K will hold an open beta for Battleborn prior to its release, and we'll have more to share about its details later this year..

Also during fiscal 2016, consumers in Asia will experience Civilization Online, our free-to-play mass multiplayer online game developed in partnership with the renowned South Korean-based studio, XLGAMES. 2K recently completed its second closed beta test for the title, and consumer response was extremely positive.

We believe this bodes well for the game's forthcoming commercial launch in Korea, which represents another important milestone in building our online business in Asia.

We also plan to bring Civilization Online to Taiwan, Hong Kong and Macau through a publishing partnership with Game First (sic) [ Gameflier ] and recently announced a deal to launch the title in China, the world's largest PC online game market through online publishing powerhouse, Qihoo 360. .

In keeping with our focus on promoting ongoing engagement, we plan to support virtually all of our upcoming titles with innovative offerings designed to drive recurrent consumer spending. We'll also continue to release offerings for many of our current titles, including additional free content for Grand Theft Auto Online..

Over the past several months, 2K has presented impressive exhibitions at a number of high-profile events that have enabled consumers, influencers and press to get hands-on time with their upcoming releases.

From E3 in Los Angeles to Comic Con in San Diego and Gamescom in Germany, the reaction to our titles has been incredibly positive, and anticipation for the launches continues to grow. In the months ahead, we'll build on that momentum to reinforce our strong outlook for this year..

Heading into and throughout this holiday season, we will deploy our worldwide marketing distribution expertise to drive sales and create must-have moments at retail. Our teams will execute well-coordinated global campaigns that leverage every relevant form of media, both traditional and social, to turn our product launches into tent-pole events.

Whether on disc or through digital download, we will ensure that our products are available to consumers whenever and wherever they want them..

Looking ahead, our robust development pipeline extends far beyond fiscal year 2016. Last week, 2K announced that Mafia III, the next installment in our successful organized crime franchise, is currently in development for Xbox One, PlayStation 4 and PC at Hangar 13, 2K's new development studio.

Planned for release during fiscal year 2017, the story of Mafia III introduces a new playable protagonist, Lincoln Clay, an African-American Vietnam War veteran who's determined to take revenge on an Italian mob for betraying and murdering his Black Mafia family.

Players will choose their path to revenge and build their own crime empire in a fictionalized New Orleans circa 1968. Mafia III combines the best of cinematic storytelling in a dynamic narrative structure that responds to player choice, situated in a city that changes based on their actions..

In addition, we have numerous unannounced games in development that are planned for release in future years, including both groundbreaking new intellectual properties and offerings from our established franchises. With our industry-leading creative assets and focus on operational excellence, Take-Two is well positioned for the long-term 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 first quarter and then discuss our outlook for the second quarter and fiscal year 2016. All of the numbers I'll be providing today are non-GAAP, and all comparisons are year-over-year unless otherwise stated.

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

The Handsome Collection, WWE SuperCard and NBA 2K15..

Digitally delivered revenue grew 139% to $254 million, 36% of which was derived from our recurrent consumer spending, which increased 47% year-over-year. The largest contributors to digitally-delivered revenue were Grand Theft Auto, NBA 2K and Borderlands.

Catalog sales accounted for $67.5 million of net revenue, led by Grand Theft Auto and Borderlands. .

Gross margin decreased to 46% as last year's first quarter product mix was more weighted towards higher-margin titles, and in this year's first quarter, we accelerated the amortization of certain capitalized development costs. Operating expenses were $119.7 million, up by $23.9 million due to higher marketing and research and development expense.

Interest and other expense was $1.8 million. Tax expense was $12.6 million. .

And non-GAAP net income increased to $34.2 million or $0.31 per share, up from a net loss of $11.2 million or $0.14 per share in the prior year's first quarter. This result is within our outlook range of $0.25 to $0.35 per share. On a GAAP basis, we reported net revenue of $275.3 million and net loss of $67 million or $0.81 per share..

Turning to some key items on our balance sheet at June 30, 2015, as compared to March 31, 2015. Our cash and short-term investment balance increased to approximately $1.2 billion. This equates to net cash of $10.41 per share, which includes the potential dilution from our convertible notes.

Our cash receivable balance decreased to $129.9 million, primarily reflecting the collection of receivables. Inventory decreased to $12.5 million due primarily to continued sales of Grand Theft Auto V, and software development costs and licenses increased to $310.4 million, reflecting the development efforts around our pipeline of upcoming releases..

Now I will review our financial outlook for the second quarter and fiscal year 2016, which is provided on a non-GAAP basis. Starting with the second quarter, we expect net revenue to range from $275 million to $325 million and net income per share to range from $0.05 to $0.15.

Revenue in the second quarter is expected to be driven primarily by NBA 2K16, along with Grand Theft Auto V and Grand Theft Auto Online. We expect second quarter gross margins in the upper 40s. .

Total operating expenses are expected to increase by approximately 17% due primarily to higher research and development and marketing expense. Selling and marketing expense is expected to be about 18% of net revenue based on the midpoint of our outlook range.

Our second quarter outlook also reflects interest and other expense of approximately $2 million, an effective tax rate of 27% and weighted average shares of approximately 115 million. Interest on the convertible notes, net of tax, is $1.4 million, which should be added back to net income to calculate net income per share..

Turning to the full year. We are reiterating our financial outlook, including net revenue of $1.3 billion to $1.4 billion and net income per share of $0.75 to $1. The majority of revenue is expected to come from Grand Theft Auto V and Grand Theft Auto Online, NBA 2K, WWE 2K, Battleborn, the Borderlands series and XCOM 2.

We expect the revenue breakdown from our labels to be roughly 60% 2K and 40% Rockstar Games. We expect our geographic revenue split to be about 55% United States and 45% international. We expect gross margins in the upper 40s. .

Total operating expenses are expected to increase by approximately 4%, driven by increased personnel expense from higher headcount at our development studios, higher research and development expense and increased 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 $7 million, an effective tax rate of 27% and weighted average fully diluted shares of approximately 115 million. .

Interest on the convertible notes, net of tax, is $5.5 million, which should be added back to net income to calculate net income per share. We expect our operations to be approximately cash flow neutral during the remaining 3 quarters of fiscal 2016 and to use cash during the second quarter. .

With fiscal 2016 off to a good start, we remain on pace to deliver another solid year, highlighted by significant non-GAAP earnings and positive cash flow.

Through the execution of our proven strategy to deliver the highest-quality interactive entertainment experiences, coupled with a sound financial discipline, Take-Two's long-term outlook is the strongest in our company's history. .

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 and a solid start to the year. 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 Eric Handler with MKM Partners. .

Just looking at your income statement. It looks like the internal royalties have been paid in arrears, as you see the profitability of the Rockstar Studio, I'm assuming.

And I'm just curious, now that we're seeing we're beyond the GTA V release with PC, should internal royalties start coming down? I'm just trying to get a sense of how we should be modeling that line item. .

Eric, are you looking at the GAAP financials or the non-GAAP financials?.

Well, you've only give GAAP for internal royalties. I don't know if you have a non-GAAP for internal royalties. .

We probably -- we don't show that. But the GAAP, the way the internal royalties is calculated is a little different than what we're doing with the non-GAAP, where the non-GAAP financials and the EPS associated with that is going to follow along with the overall profitability of the business.

And the internal royalties would be calculated based on the overall profitability of the business and that profit share at that point in time. .

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

When considering GTA, NBA, Borderlands, WWE and Evolve, across these games, can you give us any more color on how they vary in terms of leverage to digital download versus digital recurrent consumer spend? I know you highlighted GTA, NBA and Borderlands, specifically, in this quarter, drove a lot of the recurrent spend.

Are there any variances to call out in terms of which franchises are more leveraged to digital download versus recurrent digital spend?.

Brian, it's Karl. They're -- obviously, all of those titles have significant -- are significant contributors to our digital sales, both as digital download and in recurrent consumer spending. We don't have any details to provide you specifically across games -- game-to-game, but we can tell you, in general, it's growing across all of our franchises. .

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

A few questions. One, Lainie, you said that you accelerated some capitalized expense in the quarter. Can you talk about how much and why? And then Strauss, a couple of things.

M&A environment, anything notably different or goal-changing now versus, say, the last couple of years? And then anything you can add on the cash and what we can expect going forward for uses of cash and potentially, returns for shareholders?.

So the accelerated amortization of the capitalized development expenses that we've talked about, the amount is about half of what the margin effect was in the quarter. So we're not talking about what specific titles that is for, but that's announced.

And what's driving that is, on each quarter, we look at the estimates of lifetime titles of our sales, and it will adjust the capitalized development costs, the amortization for it based on what those estimates are, whether it's up or down. .

first, to support organic growth. This company story is an organic growth story -- largely; second, to avail ourselves of inorganic opportunities, I just addressed that; and third, to return capital judiciously to shareholders; and we do have an open authorization for a buyback from our board.

So I think it'll fall within those 3 buckets; this is obviously a high-class problem to have. .

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

So you've had a lot of success with recurrent consumer spending in your major titles. Are you kind of now going into development of every game with a focus on finding ways to drive recurrent consumer spending? I guess somebody already asked about specific titles that may be higher in recurrent consumer spending.

But what about genres? Are there certain genres that are better suited for recurrent spend? Or do you think the opportunity is similar across all genres?.

Mike, it's Karl. I think, first and foremost, our -- the intention of all labels in our studios is to create products that people really want to enjoy and that will delight consumers. So that's first and foremost. Whenever we're thinking about the development pipeline, it's how can we create franchises.

The best way to create a franchise is to create great product. That being said, I would say, pretty much across the board, every one of our releases on a go-forward basis should have some kind of recurrent consumer spending opportunity. There may be some titles where it doesn't make sense.

But again, that's a creative decision as much as it is a business decision. But there is no -- I don't think there are any specific genres where it doesn't play well. If you look at some of the titles today that we're -- from which we're generating recurrent consumer spending, they couldn't be more diverse.

So I think it's fair to say that, that's a focus for us across all of our titles, and I don't think that there's any set rules in terms of genres, et cetera. .

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

Karl, maybe you can talk about the decision to put Battleborn in the February release window.

Why not tuck it in, in front of the holiday? And then separately, any update you guys can provide in terms of DLC for Grand Theft Auto V?.

Drew, in terms of Battleborn, again, our -- whenever we pick a release window for any of our titles, it's really 2 specific things.

It's when the title is ready, when is the best time for us to optimize it from a creative perspective and then when do we think the right window is for that title given what's in the market and also given the natural consumer patterns of -- purchasing patterns over the years. I would say that it's really more the former.

The most important decision that we make is, is the title ready, is it the best creative -- are we putting our best creative foot forward when we're releasing a title. That's always primary.

And then we'll look at it and we'll say, is there an open window -- given that, is there an open window that we can utilize? And I think, pretty much across the board, there aren't many months in a year where we feel uncomfortable releasing a title. Most of our titles stand amongst themselves.

We don't necessarily need a holiday to drive our spending because these are very high-quality AAA titles that are tent-pole releases in and of themselves. And then in terms of DLC for GTA V, we really don't have anything to say about that today. .

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

Real policeable [ph] question. You mentioned that GTA Online, I think, is the largest sports PC online title in China. I just wondered if that's based on users or monetization or both.

That's NBA 2K online in China, and it's based on 27 million users. .

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

With digital now becoming a significant portion of your business, any reason not to think why gross margins can't, over time, get into the 50% or 60% or 70% range? And then any thoughts on digital downloads? I think last quarter you were at 20% for full game downloads.

How should we think about that kind of as we progress into the second quarter and the second half of the fiscal year, as you have more console games to be released?.

Your first question on the digital business, we do expect the margins to continue to grow as we continue to get our digital business getting bigger and bigger. But what percentage that's going to be, it's a little early to say, but we expect it to keep -- to continue to grow over the long term. .

And then in terms of the percentage of our business reflected by digital downloads as opposed to physical sales, we do see that growing over time. The first quarter was disproportionately high because of the release of Grand Theft Auto V for PC, which tends to be a heavily downloaded format.

But we also see the percentage growing for consoles over time, and I don't think we're quoting a specific figure. .

[Operator Instructions] Our next question comes from the line of Mike Hickey with Benchmark Company. .

Curious on Mafia III. It looks like it's had a pretty strong reveal at Gamescom last week, and I'm certainly not, but others are sort of making comparisons to sort of a Rockstar open world experience. And obviously, Mafia is a franchise.

But curious if the development of Mafia III has been able to leverage the technical expertise from your Rockstar team.

Maybe less specifically, if you can't answer that question, if you've been able to drive a sharing environment across your development studios?.

We're blessed that we have 2 distinct labels at this company, and multiple studios with a lot of talent. We do not have a tech sharing environment; very congenial company, but we don't think that's the best way to get the best out of our development folks. It's not the way it works around here. Mafia III is a completely different experience.

I wouldn't compare it to anything else out there. The reveal was great, but it stands alone. And no, we don't use any other game in the same sense as Grand Theft Auto. It is the industry's standard-bearer. It's not up for comparison. So no, I think it's flattering to even think that might be the case, but it's not. .

All right. Fair enough. The last question for me, just curious, it looks like for the quarter, obviously, digital spend is better, reoccurring spend is better at least versus your expectations. Now it seems you're more optimistic on recurrent digital spend in '16, now looking for growth and a large percentage of that bucket to your total sales.

So why wouldn't that drive upside to your original '15 -- or excuse me, fiscal '16 profitability range? I guess, basically, just curious of the offset. .

It's early in the year. We're really -- we're very happy with the way the first quarter penciled out. We have a lot of other cards to turn over. We've got, obviously, the big release in the second quarter with NBA 2K16. We're really excited about that, but it is early days yet on the thanks [ph].

It's a really good start, and we continue to believe we have a lot of work to do. And we also have a great deal of opportunity. .

Ladies and gentlemen, we have no further questions at this time. I would like to turn the floor back over to management for closing remarks. .

We'd like to thank everyone who attended the call today for their attention, for the great questions, and we do appreciate your continued support. Thanks so much. .

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