Greetings and welcome to the Take 2 Interactive First Quarter Fiscal Year 20 team earnings call. At this time, all participants are in a listen only mode. Presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.
Hank Diamond. Thank you, sir. You may begin.
Good afternoon. Welcome, and thank you for joining Take 2's conference call to discuss its results for the first quarter of fiscal year 2016. And to June 30, 2015. Today's call will be led by Strauss Zelnick, Take2's Chairman and Chief Executive Officer Carl Sladoff, our President and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q and A session following our prepared remarks.
Before we begin, I'd Oracle 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 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 the GAAP to non GAAP reconciliates 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 Nearly 2 years after its record shattering launch, Grand Theft Auto5 continues to outperform expectations. On April 14th, Rockstar Games process groundbreaking title to TC with a number of enhancements generating stellar reviews and strong digitally delivered sales.
In addition, we benefited from ongoing demand for won't expand. To date, Grand Theft Auto5 has sold in more than 54,000,000 units worldwide. And Rockstar Games is successfully driving engagement with title and meaningful incremental profits through the release of new content for Grand Theft Auto Online, which I'll discuss shortly. NDA 2K15 continues to broaden its global audience and build on the franchise's trend of annual growth. Selling of the title is cost of 7,000,000 unit mark and surpass NDA 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 the Borderlands series, particularly the Hansom 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 $254,000,000 and represented 69 consumer spending, both of which exceeded our outlook. Recurrent consumer spending represented a significant component of our overall business mix, accounting for 25 percent 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 Old Gotten Games update Part 1 and Part 2, which were launched in June July, respectively. Roughly 70% of internet connected Grand Theft Auto5 users have plagued Grand 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 My NBA 2k15 companion down notable 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 7,500,000 times and sustained growth from NBA 2K Online in China, which now has 27,000,000 registered users and continues to be the number one PC online sports title in China. Expanding 2016 and represent an increased percentage of our total business mix versus last year. Good 2016 is off to a solid start and promises to be another year of substantial non GAAP earnings and positive cash flow for Take 2. Our ability to project significant profits this year with lighter release schedule reflects that our company is now structurally a higher margin enterprise than at any time in our history.
Today, Take 2 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
Today, I'll discuss our pipeline for the remainder of fiscal 2016 and beyond. On September 29, 2K will continue their illustrious basketball legacy, 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 Star Stephen Curry, James Harden and Anthony Davis, as well as an all new Mike rear mode written and directed by acclaimed filmmaker Spike Lee. NBA 2k16 will also feature the most extensive soundtrack in NBA 2k including more than 50 tracked by notable artists such as the Ramones, Nas, JZ, MIA, Calvin Harris, and Drake. On October 27, 2K will release WWE 2K16, which will further leverage the development expertise of steps and promises to take this beloved sports entertainment franchise to exciting new heights.
Stone Cold Steve Austin, a 2009 WWE Hollifaymond Dot D and winner of 21 championships throughout his career will be the cover superstar. In addition, 2K recently announced that Action Movie ICON and WWE Hall of Fame inductee, Arnold Schwarzenegger, will make a series debut in WWE 2K16. Consumers who pre order the title at participating retailers will receive his 2 famous characters from the film, the Terminator and Terminator 2, judgment day, to compete in the squared circle against the game's roster of WWE Superstars. In November, 2K will launch Xcom II, the sequel to the 2012 Game of the Year award winning strategy title Excom and the unknown. Developed by proaxis games, Xcom tool introduced procedurally generated maps for deep replayability and will offer a 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 technically driven combat. This month, the title will be on the cover of TC gamer magazine, which features an all new detailed look at the game and interviews with the development team. Also in development for Access Games is Sid Meier's civilization beyond Earth rising ties, a thrilling in-depth expansion pack from the hit franchise that has sold in over 31,000,000 units worldwide. Rising tide extends beyond our new frontier on the planet's surface and beneath its seas, adding even more choices and diplomatic options players continue to build a new vision Fans of Firaxis game can also look forward to the 2nd annual Foraxicon in the event celebrating the studio's games and players will be held at the Baltimore Convention Center on October 3rd. For Axicon will provide consumers with an opportunity to meet members of the development team, attend panel discussions and a experienced both rising tide and XCOM2 prior to the releases.
On February 9, the release of Vattleborne promises to continue our proven track record of launching successful new intellectual properties currently in development by Borderlands Creators, Gearbox Software. Battleborne is a first person shooter 25 unique characters that grow and level up as players progress through the game. Battle Bourne will include a cooperative story mode featuring a variety of heroic adventures as well as 3 different competitive multiplayer modes full of intense, online, scheme based action. 2K will hold an open beta for Battleburn 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 renowned South Korean based studio XL games.
2K recently completed a second closed beta test for the title and consumer response was extremely positive. We believe this bodes well for the game 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 on Kong and Macau through a publishing partnership with Game First and recently announced a deal to launch the title in China, the world's largest PC online game market, through online publishing powerhouse, Chihoo 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 at a number of high profile events that have enabled consumers, influencers and press to get hands on time with our 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 and 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 Tenfold 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 3 The next installment in our successful organized crime franchise is currently in development for Xbox 1, PlayStation 4, and PC at Hanger13, 2K's new development studio. Planned for release during fiscal year 2017 The story of mafia 3 introduces a new playable protagonist, Lincoln Clay, an African American Vietnam war veteran who is determined to take revenge on the Italian 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. Matfia III combines the best of cinematic storytelling with 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 offerings from our established franchises. With our industry leading creative assets and focus on operational excellence, Take 2 is well positioned for the long term success. I'll now turn the call over to Lainie.
Thanks, Carl, and good afternoon, everyone. Today I'll review our results for the fiscal first quarter and then discuss our outlook for second quarter 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. Press release provides a reconciliation of our GAAP to non GAAP measurements. Starting with our results for the fiscal first quarter, revenue grew 142% to $366,400,000.
This result exceeded our revenues from Grand Theft Auto5 and Grand Theft Auto Online, as well as upside from a number of other titles, especially Borderlands, the Hanson Collection, WWE Vaccard and MBA 2k15. Distillery delivered revenue grew 139 percent to $254,000,000. 36% of which was derived from recurrent consumer spending, which increased 47% year over year. The largest contributors to digitally delivered revenue were Ant Theft Auto, NBA 2K and Borderlands. Catalog sales accounted for $67,500,000 of net revenue, led by Grand Theft Auto And Borderlands.
Gross margin decreased to 46% of 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 $119,700,000, up by $23,900,000 due to higher marketing and research development expense. Interest and other expense was 1,800,000 dollars. Tax expense was $12,600,000 and non GAAP net income increased to $34,200,000 or $0.31 share, up from a net loss of $11,200,000 or $0.14 per share in the prior year's first quarter.
This is a result of the vendor outlook range of $2.5 to $0.35 per share. On a GAAP basis, we reported net revenue of $275,300,000 a net loss of $67,000,000 or $0.81 per share. Turning to some key items from our balance sheet at June 30 2015 as compared to March 31, 2015. Our cash and short term investment balance increased to approximately $1,200,000,000 This equates to net cash of $10.41 per share, which includes the potential revisions of our convertible notes. Our accounts receivable balance decreased to $129,900,000, primarily reflecting the collection of receivable.
Inventory decreased to $12,500,000 due primarily to continued sales of Grand Theft Auto5. And software development costs and licenses increased to 3 $400,000, reflecting the development efforts around our pipeline of upcoming releases. Now I will review our financial outlook for the second quarter fiscal year 20 16, which is provided on a non GAAP basis. Starting with the second quarter, we expect net revenue to range from $275,000,000 to $325,000,000. 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 2nd quarter gross margins in the upper 40s. Total operating sales. Next is expected to be about 18 percent of net revenue based on the midpoint of our outlook range. Our 2nd quarter outlook also reflects interest and other expense of approximately $2,000,000 and effective tax rate of 27 percent and weighted average shares of approximately 115,000,000 Interest on the convertible notes net of tax is $1,400,000, 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 $1,300,000,000 to $1,400,000,000 and net income per share of $0.75 to $1. The majority of revenue is expected to come from Grand Theft Auto5 and Grand Theft Auto Online, NBA 2K, WWE 2K, Battleborne, the Borderlands Series and XCOM 2. We expect the revenue breakdown from our label 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 mid point of
$115,000,000.
Interest on the convertible notes, net of tax is $5,500,000, 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 well. Through the execution of our proven strategy to deliver the highest quality interactive entertainment experiences, coupled with the sound financial discipline, Take 2 long term outlook is the strongest in our company's history. Thank you.
Now, I'll turn the call back to Jeff.
Thanks, Carl and Lady. On behalf of our entire management team, I'd like to thank our colleagues for their support 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.
You may push star 2 if you would like to remove your question from the queue. For any participant using speaker equipment, it may be necessary to pick up your handset before pushing the star key. One moment while we poll for questions. Our first question comes from the line of Eric Handler with MKM Partners. Please go ahead with your question.
Yes. Thanks for taking my question. Just looking at your income statement, It looks like the internal royalties have been paid in been being paid in arrears as you see the profitability of the Star Studio, I'm assuming. And I'm just curious now that we're seeing we're beyond the GTA5 released 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.
Okay. You're looking at the GAAP Financials or the non GAAP south?
Well, you 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, it's a little different than what we're doing with the non GAAP 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 will be calculated based on the overall profitability of the business and that profit share at that point in time.
Okay. Thank you very much Thank you. Our next question comes from the line of Brian Fitzgerald with Jefferies. Please go ahead with your question.
When considering GTA, NBA, Borderlands, WFE and Evolve across those 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? Thanks.
Hi, Brian, it's Carl. There you obviously all of those titles have significant or significant contributors to our digital sales, both as digital downloads and in recurrent consumer spending. We don't have any details to provide you specifically across 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. Please go ahead with your question.
Hey, guys. A few questions. You said that you accelerated some capitalized expenses in the quarter. Can you talk about how much and why? And then, Strauss, a couple of things M and A environment, anything notably different or 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 uses of cash and potentially returns to shareholders? Thanks.
So for the accelerated amortization of the capitalized development expenses that we talked about, The amount is about half of what the margin effect was, in the quarter. So we're not talking about what specific title that is for, but that that's the amount. 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.
And, Ben, regarding the M and A environment, I think we see that as unchanged. As you know, on market prices are robust for certain companies in our space. And I think that reflects the fact that this is a growth area in the entertainment business and certain companies are doing very well indeed. We tend to be very disciplined. We're looking for accretive opportunities and we're very focused on value, but we don't really see any changes there.
From our point of view, in terms of cash, we increased our cash balance this quarter because operations generated free cash flow certainly good news. We're reporting roughly $1,200,000,000 in cash. We account for our converts, although they'll be satisfied with equities. So on that basis, effectively, it's net cash as well. So our view on that is a cash and our business can be a strategic asset.
It allows point to be opportunistic and it supports the company that operates within a business that does offer some risk. So we do see it as a strategic asset that will allow us to avail ourselves of both internal and external growth opportunities as they come about In terms of the use of cash, we said, there'll be 3 potential uses first to support organic growth. This company's story is an organic growth story, a large the 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 for a buyback from our board.
So I think fall within those 3 buckets, but this is obviously a high class problem to have.
Thank you. Our next question comes from the line of Mike Olson with Piper Jaffray. Please go ahead with your question.
Hey, good afternoon. 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 or us all genres? Thanks.
Hi, Mike. It's Carl. I think 1st and foremost are the intention, of all the labels in our studios. Is to create product that people really want to enjoy and that will delight consumers. So that's person foremost whenever we're thinking development pipeline is 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 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 were gener from which we're generating recurrent consumer spending, they could be more diverse.
So I think it's fair to say that that's a focus for across all of our titles and I don't think that there's any set rules in terms of genres, etcetera.
Thank you. Our next question comes from the line of Drew Crum with Stifel. Please go ahead with your question.
Okay. Thanks. Good afternoon, everyone. Carl, maybe you can talk about, the decision to put, Battle Born in the federal 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 Five?
Thanks.
Hey, Drew. In terms of Battle Born, again, our whenever we hit a release window for any of our titles, it's really 2 it's 2 specific things. It's when the title is ready, when is the best time for us to optimize from a creative perspective. And then when do we think the right window is for that petal 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 the title ready, is it the best creator? Are we putting our career 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 the 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 if these are very high quality AAA titles that are tentpole releases in and of themselves. And then in terms of DLC for GTA5, we really don't have anything to say about that today.
Okay. Thanks guys. Thank
you. Our next question comes from the line of Doug Kreutz with Cowen and Company. Please go ahead with your question.
Thanks. Relatively simple question. You mentioned that, GTA on 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 MDA 2 Cam line in China and it's based on 27,000,000 users. Okay. Thank
you. Thank
you. Our next question comes from the line of Neil Doshi with Mitsuho. Please go ahead with your question.
All right. Thanks guys. With the digital now becoming a significant portion of your 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 had 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? Thanks.
Yes. And 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 in terms of the percentage of our business reflected by digital downloads as opposed to sales. We do see that growing over time. The first quarter was, disproportionately high because of the release of Grand Theft Auto V for PT. Which tends to be a heavily downloaded format, but we also see the percentage growing for consoles over time. I don't think we're quoting a specific figure.
Thank One moment while we pull for more questions. Our question comes from the line of Mike Hickey with Benchmark Company.
I'm curious on Lafayette Tree. It looks like it's, had a pretty strong reveal at a games column last week. And I'm certainly not, but others are sort of making comparison to sort of a rock star open world experience. And obviously a Mafia as a franchise. But curious that the development of Mafia 3 has been able to leverage some of the tech or expertise from your rock start team, maybe less specifically, you can't answer that question.
If you've been able to drive a sharing environment across your development studios? Thank
you. We're glad 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, not the way it works around here. Mafia III is is a completely different experience.
I wouldn't compare it to anything else out there. The reveal was great. But it stands alone. And and no, we don't use any other game in the same sentence as Grand Theft Auto. It's it is the industry standard bearer.
It's it's not up for comparison. So no, I think it's flattering to even think that may be the case, but it's not.
After enough. The last question from me, just curious on it looks like for the quarter, obviously, digital spend was better reoccurring spend was better at least versus your expectations. Now it seems you're more optimistic on recurrent digital spend in 'sixteen 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 2015, or excuse me, fiscal 2016 top ability range. I guess basically just curious the offset.
Thank you.
It's early in the year. We're really we're very happy with the way the this 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, it's a really good start and we continue to believe we have a lot of work to do. We also have a great deal of opportunity.
Thanks, Strauss. Good luck.
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.
Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect