Greetings, and welcome to the Take 2 Interactive Software Quarter 2 Fiscal Year 2015 Earnings Call. At this time, all participants are in a listen only mode. 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 2 Interactive. Thank you, Mister Diamond.
You may begin.
Good afternoon. Welcome and thank you for joining Take Two's conference call to discuss its results for the second quarter of fiscal year 20 15 ended September 30, 2014. Today's call will be led by Strauss Zelnick, Take 2's Chairman and Chief Executive Officer Carl Ladoff, our President and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during Q and 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 information currently available to us. Results may vary significantly from these forward looking statements based on a variety of factors. These important factors are described including the company's annual report on Form Ten K for the fiscal year ended March 31, 20 14, including the risks summarized in the section entitled Risk Factors and in the company's quarterly report on Form 10 Q for the fiscal quarter ended June 30, 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. Thanks, Hank. Good afternoon and thank you for joining us today. I'm pleased to report that for the 9th consecutive quarter, take to deliver better than expected results, which further illustrate our company's continued positive momentum. Key drivers for the period were strong sales led by Grand Theft Auto5, NBA 2K14, and Borderlands 2, and continued growth in digitally delivered revenue from our current consumer spending particularly for Grand Theft Auto Online.
Grand Theft Auto Five remains our company's and industry standard bearer for creative and commercial excellence. More than a year after its record breaking launch, the title is still captivating new audiences on PlayStation 3 and Xbox 360, And we believe its enduring popularity will grow even stronger when the title makes its November 18th to view on PlayStation 4 and Xbox 1. NDA 2K14 and Borderlands do also continue to attract new fans and generate meaningful revenue from recurrent consumer spending long after their initial release dates. Their ongoing success underscores the durability of our key franchises and demonstrates that consumers remain engaged with our highest quality titles for prolonged periods of time and then eagerly return on day 1 to experience each new iteration. A diverse array of other titles also contributed to catalog sales during the quarter, including the Grand Theft Auto Series, WWE 2K14, Sid Meier's Civilization V, Red Dead Redemption and BioShock infinite.
Our deep catalog of must have titles is an important competitive advantage and provides a predictable contribution 89.8 revenue was derived from recurrent consumer line, which has both exceeded our expectations and has been the single largest contributor to digitally delivered revenue in every quarter since its launch. During the second quarter, Rockstar Games released 2 updates, including the San Andreas flight school update and the last team standing update. The ongoing release of new content for Grand Theft Auto Online keeps consumers immersed in the game's vast open world, and we remain highly enthusiastic about its future including the upcoming launches on PlayStation 4, Xbox 1, MPC. Recurrent consumer spending for NBA 2K also grew during the second quarter with revenues up approximately 135 percent year over year. We expect that online play and virtual currency will continue to be important contributors to the success of our industry leading basketball franchise.
A variety of other offerings also contributed to return consumer spending in the second quarter, including downloadable add on content for Borderlands 2 and other titles, NBA 2K online in China and in game spending on WWE SuperCard, which has been downloaded commercially successful free to play mobile offering. Continuing to create opportunities to drive ongoing engagement with our titles after release is a high margin we plan to support our future releases with innovative offerings designed to drive recurrent consumer spending. Full games downloads across console, PC and mobile platforms also contributed to digitally delivered revenue. During the second quarter, we expanded our offerings for tablets and smartphones with the release of BioShock and Sid Meier's Civilization Revolution 2 for iOS. We're committed to providing our products on all relevant platforms regardless of the screen size and through all distribution channels, both physical and digitally delivered.
Our fiscal third quarter is off to an excellent start with 1 of the strongest and most diverse holiday lineups in the history of our company. The initial response to our recent releases, including NBA 2K15, Borderlands the pre sequel, Sid Meier's civilization beyond Earth, and WWE 2K 15 has been outstanding, as Carl will discuss shortly. Through the tireless passion and dedication of our teams, we've been able to accomplish the challenging task of simultaneously delivering 4 AAA titles within a single month, supporting them with world class marketing campaigns and executing seamless global distribution In doing so, 2K has further exemplified its impressive capacity for growing its business by delivering multiple high quality products and building leading franchises. And there's more to come. As a result of our better than expected second quarter performance, strong current business trends and positive outlook, We've raised our revenue and earnings expectations for fiscal 2015, which is on pace to be one of our best years ever.
Looking ahead to fiscal 2016 and beyond, we have a robust pipeline of yet to be announced titles and development, including both groundbreaking new intellectual properties and new releases from our established franchises coupled with digitally delivered offerings designed to drive recurrent consumer spending. Our company is better positioned than ever to continue delivering long term growth, profits and returns for our shareholders. I'll now turn the
basis and line up the remainder of fiscal 2015. On October 7th, 2K launched NBA 2K15 and further cemented the franchise's undeniable a prior gen, next gen, and PC. NBA 2k15 has been lauded by consumer and media for once again, raising the bar for sports realism and gameplay. This year's Xbox 1 and PlayStation 4 versions offer a variety of new features, including revolutionary 3 d facial scanning, which enables players to put themselves into the game while living the life of a player in my career, becoming the face of franchise in MyGM or playing with friends online in multiplayer modes. Fans of NBA 2k15 also can engage with the game on their tablets and smartphones through a full featured mobile version and the My NBA 2k15 companion app.
MBA 2k15 has enjoyed the strongest launch in the history of the with both record 1st week selling and sell through across all platforms and currently is the highest rated sports game released this year on PlayStation 4 based on metacritic.comrankings. On October 14th, K released Borderlands, the pre sequel for Xbox 360, PlayStation 3 and PC. The title is off to a strong start, demonstrating that their still a vibrant market for must have FireGen titles. In keeping with the franchise's tradition of successfully driving recurrent consumer spending, Orderlands, the pre SQL will be supported by 4 Action Rich downloadable add on packs, which also can be purchased together via season pass. Borderlands continues to be one of our company's most popular franchises, and Borderlands to PreSQL is another great offering for die hard fans and newcomers alike.
On October 23rd, 2 K hit the ice with NHL 2 K for iOS and Android. We are excited to provide hockey fans a full featured mobile gaming experience, consistent with our strategy of exploring select opportunities for tablets and smartphones. On October 24th, 2K expanded their wildly successful civilization with the release of Sid Meier's Civilization, the On Earth, for which the series is famous, while propelling players beyond the traditional timeline of a civilization game by exploring humanity's future on an alien world. Civilization beyond Earth is off to a great start and has garnered positive critical reception from influential press with game informer awarding 4 of 9 out of 10 and declaring the title, a worthy error of the civilization name, and a must play for strategy plans. Yesterday, 2K released WWE 2K 15 for Xbox 360 and PlayStation 3, and also will bring the title to Xbox 1 and PlayStation 4 on November 18th, developed collaboratively by visual concepts and use.
WWE 2k15 offers major gameplay enhanced improve commentary and a collection of the biggest roster of WWE Superstars. For the first time in the history of the series, WWE 2k15 includes my career mode, a fan favorite from our NBA 2k series, which enables players to experience the life of a rookie WWE superstar and rise to the ranks to earn a title shot at WrestleMania. The title also will be supported with an citing array of downloadable content, including a season pass. The initial launch of WWE 2k15 is off to an encouraging start and we expect the combined I'd like to congratulate 2 K and their studios, visual concepts, 2 K Australia, and for access teams, as well as our external partners at Gearbox saw ware and YUPES for delivering a stellar array of titles for this holiday season. Their commitment to excellence is evident within each release, and we are very proud of their contribution organization.
Now I'd like to discuss our upcoming pipeline. On November 4th, 2 cable released BioShock Infinite to complete the vision for Xbox 360 and PlayStation 3. Featuring the award winning title and all of its previously released add on content, complete edition provides unprecedented value and is a must have item for gamers who have yet to experience bioshock infinite's graph least stunning world, deep and immersive storytelling and heart pounding action. On November 18th, Rockstar Games will launch the record shattering hit FFO 5 on PlayStation 4 and Xbox 1 with the PC version to follow on January 27 2015. In addition to increased draw distances and higher resolution, players can expect a range of additions and improvements, including new weapons, vehicles, and activities, additional wildlife, denser traffic, a new falling system, enhanced damage and weather effects, and much more.
Players returning from the PlayStation 3 and Xbox 360 versions will get access to a host of new, exclusive content, including rare versions of classic vehicles from across the Grand Theft Auto Series, activities such as what such as wildlife photography, new shooting range challenges, new weapons, and more. Included with Grand Theft Auto V is free access to Grand Theft Total on 5, which now will feature online play for up to 30 players on PlayStation 4 and Xbox 1. The current community of players will have the ability transfer their Grand Theft Auto Online characters and progression to their choice of either PlayStation 4, Xbox 1, or PC. In addition, all content and gameplay created for both Grand Theft Auto 5 and Grand Theft Auto Online will also be available for the PlayStation 4 Xbox 1 and TC with more to come. Rockstar Games will continue to support both Grand Theft Auto5 and Grand Theft Auto Online with new offers throughout fiscal 2015 lineup will be 2K's February 10th launch of Evolve for PlayStation 4, Xbox 1, and PC.
Developed by total rock studio, Evolve is the only title in history to win game of show honors at both e3 and gamescom in the same year. Consumer anticipation for Evolve continues to build and starting tomorrow through November 2nd, the big alpha test for this 4 versus 1 multiplayer shooter will be available exclusively for 24 hours on Xbox 1. In addition, the alpha test will available on PlayStation 4 and PC from October 31st to November 2nd. While the alpha test is not fully representative of the final product, it will give our teams a chance to test the game in the hands of our most passionate consumers, and we will test it again in the open beta for Evolve exclusively for Xbox 1 in January. We remain incredibly excited about the potential for Evolve.
Looking beyond this fiscal year, we have a robust pipeline of titles To date, we have revealed 2 k's Battleborn, an all new intellectual property developed for NextGen and PC by Gearbox Software. The creative team behind our Borderlands franchise, which is planned for release during fiscal 2016. The title, which was featured on the August cover of game informer is a blended genre game that combines first person shooting, cooperative combat, and an expansive collection of characters to deliver an all new hero shooter experience. We'll have more to announce about our future lineup in the months to come. In closing, I'd like to join Strauss in thanking our global teams for delivering a superb holiday lineup and continuing to execute our proven strategy of creating the most innovative and highest quality titles in our industry.
I'll now turn the call over to Laney.
Second quarter and then discuss our outlook for the third quarter fiscal 2015. 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 second quarter, net revenue was $135,400,000 versus $1,270,000,000 in last year's second quarter. Which had benefited from the record breaking launch of Grand Theft Auto V.
This result exceeded our outlook range of $95,000,000 to $110,000,000 which is stronger than expected catalog sales and digitally delivered revenue, particularly from Grand Theft Auto5, Grand Theft Auto Online, Borderlands 2, the WWE 2K franchise and MPA 2K14. Digitally delivered revenue accounted for $89,800,000 of net revenue versus $105,500,000 last year. Revenue from recurrent consumer spending, including content and online games grew 45 delivered revenue for offerings for the Grand Theft Auto Series, the NBA 2K franchise, Borderlands II and Sid Meier's Civilization5. Gross margin increased 19.4 percentage points to 58.6 percent due primarily to lower internal royalties and a higher percent of digitally delivered revenue Operating expenses were $110,300,000, down by $49,200,000 as last year's second quarter included higher marketing expense for the launch of Grand Theft Auto Five. Interest and other expense was $2,000,000, a non GAAP net loss of $35,400,000 or $4.4 per share as compared to net income of $325,600,000 or $2.49 per share in fiscal second quarter 2014.
This result exceeded our outlook range of a loss of $0.60 to $0.70 per share. On a GAAP basis, we report revenue of $126,300,000 and loss from continuing operations of $41,400,000 or $0.51 per share. Turning to some key items from our balance sheet at September 30, 2014, as compared to June 30, 2014. Our cash term investments balance decreased to $803,800,000. Our accounts receivable balance decreased to $25,400,000, primarily reflecting the collection of receivables.
Inventory increased to $55,900,000 due primarily to build up for October releases, and software development costs and licenses increased to $327,000,000, reflecting the development efforts around our pipeline of upcoming releases. Now, we will review our financial outlook for the third quarter fiscal 2015, which is provided on a non GAAP basis. Starting with the full fiscal year as a result of our better than expected second quarter performance, strong current business trend, and positive outlook or upcoming releases, we are increasing our outlook for both revenue and net income per share. We now expect net revenue to range from 1.4to1.5 $1,000,000,000, up from the prior range of $1,350,000,000 to $1,450,000,000, and net income to range from $1.05 per share to $1.30 per share, up from the prior range of $0.80 to $1.05 per share. Turning to the details of our full year outlook.
The majority of our revenue is expected to come from Grand Theft Auto V and Grand Theft Auto Online, NBA 2K15, Borderlands with Pre Sequel, WWE 2K15 and evolve. We expect the revenue breakdown from our label to be roughly 60% from starking. We expect our geographic revenue split to be about 60% in the United States and 40% international. We expect gross margins in the mid to upper 40s. Total operating expenses are expected to increase by approximately 7%, driven primarily by personnel expense on a higher headcount, higher fees and higher depreciation expense.
Selling and marketing expense is expected to be about 17% of net revenue based on the midpoint range. And we protect interest and other expense of approximately $9,000,000 to tax expense of about $44,000,000 and weighted average fully diluted shares of approximately 114,000,000. This reflects weighted average basic shares of approximately 80,000,000 8,000,000 participating shares for unvested stock based compensation awards and 26,000,000, representing the potential dilution from our convertible notes under the if converted method which should be added back to net income to calculate net income per share under the if converted method. We expect to generate cash during the second half of fiscal twenty fifteen and a result of our better than expected results, increased outlook and cash received from the sales switch, we now expect to be approximately net cash flow neutral for the full fiscal year. We continue to expect to generate cash from operations in fiscal net revenue to range from $745,000,000 to $750,000,000 and net income to range from 1.35 of $1.45 per share.
The majority of our revenue is expected to come from Grand Theft Auto V and Grand Theft Auto Online MBA 2K15, Borderlands of Receivable, WWE 2K15, and Civilization beyond Earth. We expect gross margins in the 40. Total operating expenses are expected to increase by approximately 33% from the prior year's third quarter, primarily due to higher marketing expense holiday releases. Selling and marketing expense is expected to be about 13% of net risk based in the midpoint of our outlook range. 3rd quarter outlook also reflects interest and other expense of approximately $2,000,000, tax expense of $32,000,000 and weighted average fully diluted shares of approximately 114,000,000.
This reflects weighted average basic shares of approximately 80,000,000, 8,000,000 participating shares, 26,000,000 shares, representing the potential dilution from our convertible notes under the if converted method of accounting. Interest on the convertible notes set a tax of approximately $1,900,000, which should be added back to net income to calculate net income per share under the if converted method. In closing, fiscal 2015 is poised to be among Take 2 fast years ever. We continue to benefit from top creative assets coupled through the Sound Financial Fundation, which provide our organization with the flexibility both to exceed our core strategy and to capitalize on new opportunities for growth. We are well positioned to to deliver non GAAP profits every year for the foreseeable future and return to our shareholders over the long term.
Thank you. Now I'll turn the call back to Jack.
Thanks, Carl and Aleni. On behalf of our entire management team, I'd like to thank our colleagues for their contributions to our success. To our shareholders, I wanna express our appreciation for your continued support. We'll now take your questions.
Thank you.
For any participant using speaker equipment, it may be necessary to pick up your handset before pushing the star keys. One moment, please, while we poll for questions. Our next question comes from the line of Justin Post with Merrill Lynch. Please proceed with your question.
Got it. Thank you. A couple of questions on GTA5. When you think about the huge player base that's out there, think you can get a decent conversion among people to maybe try and buy GTA5? What's kind of your thinking around that?
And then could you iterate or repeat those digital numbers? Did you say half of your digital is coming from GTA5? Just want a clarification on that. And then maybe one for Lainie about the cash. Clearly going to be a year with solid earnings.
Where are you deploying some of that cash that's not really coming through on the cash flow statement. Thank you.
In terms of GK5, obviously having sold something like 34,000,000 units of GK5 for what is now prior gen, we know we attract a very significant core gamer audience, and we also attracted people who are not core gamers. But we don't think we had 100 percent market share of everyone who had platforms. And so we do think there's an opportunity for people who haven't yet enjoyed the title to enjoy it for next gen. Equally, when you do go buy a new platform, seems to me that it would be very exciting to have one of the most important titles in the industry. But we tend to like to talk about this stuff after it's happened, not in advance.
Really proud of the lineup we've had. We're immensely proud of the achievements of the Rockstar team for GTA, and we're anxiously awaiting the November release. So we'll see how it goes. And Lainie can add your question about, digital, then I'll take it back up on cash.
Okay. For digital, we said $90,000,000 for the quarter was some digitally delivered offering. And 58% of that came from our recurrent consumer spending, which grew 45%. So we didn't specifically break out what GTA online was, but that's the information we gave around the digital this.
And then just in terms of deploying our cash balance, we've said repeatedly that, we've used and expect to use cash to support organic growth been a good story on organic growth. In 2007, our apples to apples net revenue was roughly $700,000,000 this year, we're guiding to a $4,000,000,000 to $1,500,000,000 last year is obviously well over $2,000,000,000. And that's all been generated to organic growth. We've we are risk verse folks, we don't intend to change that. Certainly don't intend to be profligated, but we do see growth opportunities, that we now the ability to avail ourselves of, especially as we head into what we believe will be a very significant growth period driven by these, new consoles coming online.
Secondly, we said we'll contemplate, accretive acquisition or inorganic growth. We've been very selective in anything that we've done so far. Then, thankfully, it's all worked out for us. But that is something we can now contemplate. But I wanna emphasize that we're only interested in accretive deals and I mean accretive within a reasonable period and accretive on a mathematical basis, not just a business model us.
And finally, we've shown a willingness to return cash to the shareholders. We had a very meaningful stock buyback last year, and that's another opportunity as well. So Minimally there are 3 possible uses. I think it's also worth noting in our business, cash is a strategic asset, like any entertainment there's an element of risk and volatility in our business. We've aimed very much to drive that out.
We definitely have a much more predictable and much less volatile and there were year than we used to have years ago, but having a meaningful amount of cash does allow one to, play through the inevitable ups and downs of business and to avail ourselves of opportunities when they do arise.
Great. Thank you. Maybe one follow-up.
Why would cash earnings be below operational earnings this year? Just trying to reconcile the difference between the cash flow state the income statement just for this year. It looks like a kind of a difference between the 2 this year.
It's definitely our buildup of our development. Costs on our games and our strong pipeline going forward. That's what's causing the difference.
So growth in software, software development on the balance sheet?
Thank you. Our next question comes from the line of Drew Eric Handler with MKM Partners. Please proceed with your question.
Yes. Thanks for taking my question. I wonder if you could talk a little bit about the state of retail right now as we sort of get closer to holiday season. Are you finding that retailers are having a willingness to take on physical inventory. And are you seeing any skittishness as sort of the as consumers sort of steadily migrate to, more full game downloads.
Hi, Eric. It's Carl. We've actually seen a very robust retail market and all of our retail partners, have been enthusiastic about our titles. To the extent there's any skittishness in the market and, we've, we have heard rumblings of some of it. We haven't seen any of it at this point.
So we're very sanguine. And what the status state of the market is. And frankly, there's nothing that we've been told by any of our partners because there's any significant concern. So we think gonna be a fantastic holiday season. And we're incredibly excited about the lineup that we have, which is a much bigger lineup than we're used to having at the time of the year.
So, we feel good.
Okay. And just one follow-up for Lainie. Looks like operating expenses came in a little bit lower than expected. Anything going on there in terms over those just reallocated or maybe some permanent, taking out of the business or, you know, just talked a little bit about that.
In Q2, what we saw in operating expenses was a little bit lower in terms of our marketing expense and it was some timing. So most of that marketing we'll see in the the year in Q3 and Q4.
Our next
question comes from the line of Drew Chrome with Stifel. Please proceed with your question.
Okay. Thanks. Good afternoon, everyone. So I wonder if you could comment on the decision to push GTA5 on PC back to January and any impact that has on your guidance. And then separately, uh-uh, borderlands, the pre SQL, could you comment on how it's sold or what the sell in look like relative to borderlands too?
And and then I have a follow-up. Thanks.
Yeah. When we move a title, it's almost always the same answer, which is giving a title a bit more developed time to make sure that it can be everything that it ought to be. And while we would prefer never to change a release date, it's proven to be a good move for us in general. Because, we have the highest Metacritic ratings in the business. And that correlates with revenue and ultimately, of course, profitability.
In terms of borderlands, the pre SQL natural lease, it's available only for what is now prior gen. It's not available. Currently for next gen. We're very happy with the initial results. Remains to be seen.
It's early days yet, but you wouldn't you wouldn't want to comp it to the over the last border lands. So I don't think that'd be an appropriate comp right now.
Okay. Fair enough. And then just last question, Strauss, as far as fiscal 'sixteen is concerned, you've made rep reference a couple times to the quote robust pipeline. You've got some momentum with digital, and you expect to be net cash flow positive, net year. Can you, you know, is it too early to comment on growth prospects for next year?
How comfortable are you that the business can grow versus 2015? Thanks.
We feel good about the place the industry is in that put take 2 to decide for the moment. This has historically been an excellent time for the business. And couple of our important peers are performing and have made pretty good announcements of late. The early stages of the launch of new hardware historically is doing a very good thing for the interactive entertainment business and this time around appears, to be no exception the contrary, it looks like it's going to be a very robust period in terms of initial selling. The key competitors who strat these make sense, who have strong balance sheets, who have strong owned intellectual property and strong technical abilities, and we put ourselves in on that shortlist should be very well positioned, but we're not, we're not the only ones.
We've given as much color as we can on 20 16, it's much more color than we used to give frankly. We don't have much more to add now. And as we have marketing announcements, of course, our labels will make them. But sitting here today, we feel obviously because we've increased our financial outlook for this year, We feel very, same one about this fiscal year. And again, sitting here today, we feel as though 16 is unfolding nicely as well, but it's early yet.
Got it. Okay. Thanks, guys.
Thank you. Our next question comes from the line of Daniel Ernst with Hudson Square. Please proceed with your
it seems interesting to me that the 2 of the biggest gains out this holiday are actually upgrades of prior games. One is of course is yours in GTA5 coming to NextGen and the other is Halo being re released in all the series for at least 1 of the next gen consoles. And so I'm wondering is that a treatment of other games in gen and be re released, but upgraded. And then 2, the Haywell thing is interesting then it's repackaged the entire story into kind of one game. And is that something you might consider for GTA given the the deep history of that game, not just GTA5, but, you know, all the way back, you know, for the last decade or so.
And then 2, also on GTA, wondering if you could comment on what percentage of the people have bought the game are still engaged with the game either offline or online and within the online and what percentage of those online players are also payers? Thank you.
Yes. In reverse order, you know, appreciate the question. This quarterly report continues to reflect that grant theft auto online has been a significant contributor to our results. And obviously, we repeatedly said they were gratified by how the title's performing, both the full game release as well as the online component. And we've been gratified by the long lasting nature of that.
But beyond that, we haven't given out much more data. And I don't see us doing that right now either. In terms of the kind of titles that we've put out and I understand your question, in any given year, we and our key competitors launching intellectual properties and and new iterations of older properties. And occasionally, when we see a platform shift, we will take an old property and create an of that in a very similar form for NextGen. And we wouldn't rule anything out.
That would be driven by the market opportunity that we perceive. And the potential for delivering a quality release. And that would be very much something that would also be driven by the passion of our labels. Would not be something that we would mandate to our labels. Our labels are driven by, which is higher to delight consumers and pursue their creative passion and that's been a formula that's worked extraordinarily well for this company for the past 7 years.
So we're not we don't have a policy answer to it, except our job around here is make sure that consumers are thrilled to deliver the very best titles in the marketplace and to make sure that for the top creative talent in the industry, the the number one place to work
Thank you. Our next question comes from the line of Ben Schachter with Macquarie. Please proceed with your question. Congratulations
on the continued solid execution. A few questions. Strauss, when you're talking about Rockstar, some investors still think it's just GTA wondering if you could walk through some of the other key Rockstar franchises and comment on what they mean to take to? And also, can you tell us if there's any new IP that is being developed by Rock or is everything in the pipeline based on existing IP? And then coming at the GTA next gen question a little differently, can we get a sense of what it looks like in your guidance versus the original launch it?
Does the guidance assume it's 10% is big, 20% is big, 30%, etcetera? And then just finally, when you're looking at potential acquisitions, primarily looking to buy something very much directly related to video games or you're looking more broadly in media?
So then let me take your first and your third and I'm going to ask you to repeat your second after I've done that because you were speaking quickly, and I'm slow on the uptake. In terms of Oxar, I think you know, as well as any one other franchisees include Red Dead, which has been massively successful for our for Rockstar and for our company, the midnight club franchise Max Payne and numerous other type In terms of what Rockstar is working on in any given time, we really want our labels to make an out and focus on the consumer and marketing. And, that's something that you'd hear from Rockstar on when the time is right. In terms of acquisitions, the interactive entertainment business is the only growth business in the audio visual entertainment business. And there are areas of that business to which we currently do not have exposures.
So there's plenty of opportunity out there. But we don't rule anything out as long as it fits with the company's DNA as long high quality and clearly would have to be, digitally focused entertainment. And I'm sorry. Could you repeat your second question for me?
Yes, it's just for Lane Eve. In the guidance, are you assuming that GTA 5 is 10% as big as the original launch 20% is bigger or what number should we be thinking about that?
We're not giving out details on a title by title basis of our assumptions.
Can't blame a guy for trying.
Thank you. Our next question comes from the line of Brian Fitzgerald with Jefferies. Please proceed with your question.
Thanks guys. You announced that the closed alpha of Evolve and we've seen these closed alphas more frequently now. So just kind of wondering what kind of pre order of brand if do you generated out of these things? Or is it more about benchmarking and scaling the online multiplayer pieces or monitoring engagement? And then at the margin, does it drive more digital purchases versus retail purchases?
Thanks.
It's, Brian, it's Carl. I'd say it's definitely more of the latter in terms of the reason why we do this. It's really more to test the game out to understand the consumer feedback and to make sure the game is working properly so that we can, we can adjust our development efforts as we see fit. There may be an incremental marketing benefit to it, but frankly, that's not the primary reason that we would do something like that. It really is purely on the development side.
In terms of, skewing towards digital. You know, we really haven't done an awful lot of these, really, if any. So we don't really have any fur a lot of firsthand experience in terms of, is it going to skew for digital? I suppose you can make an argument that when you engage people on that way, they're already predisposed. To downloading something digitally because that's the way it's typically available.
You could make that argument, but how it plays out, it's frankly, we really don't care because we don't care how people get it. We don't care if they download it. We don't care if they get it on a disk. It doesn't make a difference to us.
Thanks, Carl. And then maybe one quick one on, you pointed a broad strength across all platforms with NBA 2k. Any comments on traction differentiation across the platforms or does it kind of correspond to market share? And when you mentioned the Amazon devices, Any early traction you see in there with respect to gaming and Android NBA 2Ks, is that exclusively on Amazon, Android? Because you specifically call out, you know, available on iOS and Amazon devices.
Thanks.
Okay. In terms strength across the platforms. I mean, the good news is that we're we're having strength in MBA across all of our platforms. And in terms of weight between platforms, I don't think we're seeing anything terribly different than we've seen before. So the good news is that we feel good across all, all the platforms.
I'm sorry, what was the other question?
It's just on, with respect to NBA 2K, you call out availability on iOS and I'm sorry, Amazon devices. That's not exclusive to Amazon Android, right?
Well, those are the only two the only two platforms that we've announced anything are that they're on at this point. So we haven't talked about other platforms that may that it may or may not be on.
Okay. Thanks guys.
Our next question comes from the line of Edward Williams with BMO Capital Markets. Please go ahead with your question.
Just good afternoon. Just to follow-up a little bit. Carl, I know you don't care necessarily how the devices or the games are delivered. But can you give us a sense as to what sort of change you're seeing in terms of the digital distribution of full game downloads, relative to what you've seen in prior cycles. And then also, can you guys follow-up a little bit as to what the status is with some of the partnerships you've got going on in Asia?
Yeah. In terms of digital, in terms of the strength of digital distribution, obviously, Digital distribution is incredibly strong, continues to strengthen in the PC market for us. It's a very, very, very important component of that market and, we continue to see growth in that particular segment. In terms of console, we're seeing ranked across the board digitally and also on from a physical side. And in terms of, is it are we getting more digital I would say that, certainly there's more digital activity at this point, but it's it's not something that that we that we see changing in a rapid fashion that is, that's worth noting at this point.
And in terms of, China, things are going well. NBA 2k China Online continues to perform well. We continue to be, optimistic about civilization coming and, we're excited.
Our next question comes from the line of Larry Haverty with Tamco. Please proceed with your question.
Hi. I just have a couple of questions. 1, do you have a strategy with regard to removing the convert? Are you going to force conversion at the first opportunity? And could you walk us through what that is, or it just, let it sit there so that people who, want to own equities can show that they're owning bonds.
Well, one of our the most recent, the earliest convert is going to be up in 2016. So it doesn't really seem to make sense right now for do anything about that until that time, but we continue to look at it and see if there's an opportunity to make any changes in our capital structure.
Okay. And second thing is, do you have any view on what the marketing plans are for the next gen systems from, Sony and Microsoft, for the, the 4th quarters. It's been reasonably silent and so far, it looks like the next gens are selling quite well, but I'm just interested in any insights you might have one, what the, Gamebox guys are actually doing to get more of these products into consumer hands.
Larry, we agree that the we are very encouraged by the sales of, next gen of next gen the next gen of is. Things are going really, really well. I know that everyone is expecting a very hot season this year. In terms of specific marketing plans, we really don't know any more than you guys publicly announced. We know that Microsoft has announced a pricing change, which should certainly benefit in the installed base on that platform.
But in terms of specific plans, that's something that we don't know.
Our next question comes from
you. And I'd like to add my congratulations on a solid quarter. I had a more general question for you guys. In the past, We've all looked at preorders as a good predictor of success for games with more stuff happening digitally, more full game downloads, etcetera. I'm wondering if how you are thinking about games as you develop them.
What do you monitor? Is it social media, chatter? Other things, particularly with something like Evolve? How are you thinking about that? And then I have a follow-up.
Yes, I mean, presales tend still to be a pretty good leading indicator, awards covers, press, social media and the like can also be good indicators. And we do have market research to track that as do our competitors. So, with social media, there's a bit more insight than there used to be. And I would say we have pretty good sense of that. We also need to because retail is our partner and we need to make sure that what we're willing to ship is a reflection of what we think the demand
Yes. So I guess what
I was trying to figure out is preorders are still the number one way that you are trying to figure out the potential for a game at this point?
Not really. I mean, they definitely will tell us something about launch quantities, but they don't tell us all that much about lifetime. And, but Metacritic ratings, for example, which you obviously don't know until after you've established your launch quantities can tell you something about that So I would say that pre orders are important in terms of launch from many titles, not all. There are titles of long tail. Our civilization title tend to have a very long tail.
In other instances, it can tell you a great deal, but you want to see how the title rates and then generally speaking, how consumers like it afterwards in the market to get a sense of your lifetime sales.
And then my other question is a follow-up on the full game downloads question. I know that Carl mentioned that it's not really material yet. Some of the competitors are talking about 10% to 15% of volume going through digitally. And you think about GTA5, do you think that you would be thinking about for planning purposes, something like that or just wondering how you think about it?
Hey, Arvin. It's Carl. Just just to clarify, I didn't say it wasn't material. I actually said we just didn't care. So there's a pretty big difference there, whether it's download, a full gate download, or on a disk that it's irrelevant to us.
But you can pretty much assume that we're experiencing the same the same kind of numbers as everybody else because it's kind of an industry phenomenon. It's not a very it's not a company specific or even it can't be a title specific phenomenon, but it certainly isn't a company specific phenomenon. But the point is that it doesn't matter to us. In terms of our expectation about percentage visual downloader for GTA, We wouldn't share that with you. And again, it's not something that we really focus on to begin with.
We want to be wherever the consumer is. And we have said that our margins on distribution are a bit higher. They are for the industry as well. But in terms of margin dollars, there's a bit of in our favor, but not much. But we can't control that.
What we can control is making sure that you were ubiquitous, that wherever the consumer is. And our belief is that's our job And, we can't vote the consumer votes, so it's our job to just make sure that the options are available.
Our next question comes from the line of Neil Doshi with CRT Capital. Please proceed with your question.
Great. Thanks for taking my questions. Do you guys launch mobile games like NBA 2k15 for iOS? Do you feel like these games are are bringing new people to the franchise or are you primarily getting people who own the console version and just wanted an opportunity to continue to engage and play with the games, when they're kind of away from from the console. And then, Lainie, on the gross margins, I think the highest we've seen to date.
Any thoughts on where kind of gross margins could go long term, especially as digital continues to ramp up and become a more important part your revenue mix? Thanks.
Hi, Neil. It's Carl. I would say to answer your first question about MVA mobile I would say that it's both. There are the people who are engaged specifically with the mobile titles, and there are people who engage, with the, with both, with a console title and use the mobile titles in a companion fashion. And some of our mobile releases are actually designed to be companion, to the console, but not necessarily tethered to or, or specifically required in order to play.
So the answer to your question is both. And we also experienced the same thing as WWE. We have WWE SuperCard, which is a one of our most successful, mobile releases from 2 K to date, which you can play as a standalone basis, but also have some connections into the console game. So it really is both.
In terms of the gross margin, for this quarter, we saw a bit of a higher margin based on our recurrent consumer spending being big part of the business in the quarter. And then for the full year, we said we're going to be mid to upper 40s for the year, and that's also been driven by our consumer spending that's becoming a bigger part of our business, this year. And we're hopeful to see that going forward.
Our next question comes from the line of Steven Xu with Credit Suisse. Please go ahead with your question.
Yeah. Thanks, guys. So, Strauss, I think you've consistently said before and correct me if I'm wrong or putting words in your mouth, but your willingness to take some of your existing is global, will be low cost and probably deliver it and careful. But given that you are alluding to what appears traction with NBA 2K in China and that has been in the market for some time now. Has that changed your attitude or owing this to step up the risk curve a little bit and perhaps speed up the process of taking your content to the global audience?
Thanks.
Well, our content is already available to a global audience. We we have direct distribution in the far corners of the world. And, it's one of the things that we're most proud of, there's our titles are available virtually everywhere. And of course, there are limitations in China, although that market may well be opening up also, as you probably know, consoles are launching there. There's still going to be significant content restraints, but we think there potentially are some opportunities.
If you're referring to other forms of our franchises like NBA 2 Cam Line and Civilization, selectively, we absolutely would like to pursue those and we are somewhat less risk averse than we used to be partially based on the success we've enjoyed and partially based on the balance sheet we now have, but this remains a very, very disciplined management team We operate in a risky business, the entertainment business. And what makes this company work, is it more often than not, We deliver a hit. We've been exceedingly high hit ratio. What makes this company work is that we have the strongest creative talent in the business. Working on the best collection of owned intellectual property, delivering the highest quality products in the business according to Metacritic for, I think, the last 6 years in a row.
Those things are all important and they're easy for me to talk about and really, really hard for our teams to accomplish really hard. We have to wake up every day and do it all over again, and we never ever take it for granted. We do not believe it's owed to us, and it comes based the dedication of more than 2500 people who work at this enterprise around the world. So, easy for me to say, easy for us to brag about really hard to do every day, really important to do every day. And as we do more and more of that, we have the opportunity very, very judiciously take on a bit more risk to build our enterprise.
And that's what helped us grow this company organically from some $700,000,000 in net revenue, just really what was few short years ago. And we aim to grow profitably on an ongoing basis. But saying those words and doing the job were 2 very different things, And we're exceedingly mindful of risk and we see ourselves as very careful stewards of our shareholders' capital and that's
Ladies and gentlemen, there are no further questions at this time. I would now like to turn the floor back over to management for closing comments.
Well, briefly, and we've spoken an awful lot today. Thanks for all the questions. Thanks for your attention. And we'd like to wish you all a happy and healthy and prosperous all of a season.
Ladies and gentlemen, this concludes our teleconference for today. You may now disconnect your lines at this