Greetings, welcome to the Take-Two Interactive Software first quarter fiscal year 2015 earnings conference call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications for Take-Two Interactive. Thank you, Mr. Diamond. You may begin.
Good afternoon. Welcome, thank you for joining Take-Two's conference call to discuss its results for the first quarter of fiscal year 2015 and in June 30th, 2014. Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer, Karl Slatoff, our President, and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks. Before we begin, I'd like to remind everyone that the statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.
These important factors are described in our filings with the SEC, including the company's annual report on Form 10-K for the fiscal year ended March 31st, 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.taketwogames.com. Now I'll turn the call over to Strauss.
Thanks, Hank. Good afternoon, thank you for joining us today. Take-Two's fiscal year 2015 is off to a solid start with the first quarter marking our eighth consecutive period of better than expected results. I'm especially pleased to report that we're able to deliver non-GAAP revenue growth without the benefit of any major new releases driven by our expanding portfolio of digitally delivered offerings, continued growth in our NBA 2K franchise, and persistent demand for Grand Theft Auto V. NBA 2K14 continues to expand its global audience and has become our first sports release to cross the seven million unit selling mark. The title has captivated gamers on both current and next gen platforms, surpassing both FIFA and Madden as the third highest unit selling title of any genre on PlayStation 4 and Xbox One in the U.S.
Over its past five releases, the NBA 2K franchise has grown at a compound annual rate of 25%, reflecting the consistent ability of 2K and Visual Concepts to raise the bar for excellence and build this series into one of our company's most important and durable franchises. Last September, Grand Theft Auto V delivered the most successful launch in the history of entertainment, achieving $1 billion in retail sales in only three days. Nearly a year later, the title continues to attract new audiences on Xbox 360 and PlayStation 3, with worldwide selling now surpassing 34 million units. Fans can look forward to Rockstar Games' release of the PlayStation 4, Xbox One, and PC versions this fall, which Karl will have more to share about shortly. During the first quarter, digitally delivered revenue grew 43% year over year to $106.4 million.
Nearly 90% of this growth came from recurrent consumer spending, which accounted for approximately 60% of our digitally delivered revenue during the period. The remainder came from full game downloads across console, PC, and mobile platforms. The largest contributor to recurrent consumer spending was virtual currency for Grand Theft Auto Online and NBA 2K14. Grand Theft Auto Online continues to outperform our expectations and was once again the single largest contributor to digitally delivered revenue. During the first quarter, Rockstar Games released several updates, including the Capture Creator, High Life Pack, I'm Not a Hipster Update, and the limited time Independence Day Special, which contributed to players' ongoing strong engagement with Grand Theft Auto Online. We're highly enthusiastic about the future of Grand Theft Auto Online, including its upcoming fall launch on PlayStation 4, Xbox One, and PC.
Recurrent consumer spending for NBA 2K also continued to grow during the first quarter with revenues up 150% year over year. Online play, including multiplayer gaming, has become an important enhancement to most players' engagement with our industry-leading basketball franchise. Downloadable add-on content for our frontline titles is also a key contributor to recurrent consumer spending. During the first quarter, we broadened our offerings with the release of Borderlands 2: Headhunter 5. Recurrent consumer spending was also enhanced by our free-to-play online games in Asia. In particular, NBA 2K Online, which we launched in partnership with Tencent in China, continues to deliver growth in revenues and player engagement.
Gamers in Asia can also look forward to the commercial launch of Civilization Online, our massively multiplayer online game based on our successful Sid Meier's Civilization franchise, which is being developed by MMO design luminary Jake Song and his team at XLGAMES in Korea. Catalog sales accounted for nearly 55%, or $82.7 million of our first quarter revenue, led by the Grand Theft Auto series, Borderlands 2, which has now sold in more than 10 million units, Sid Meier's Civilization V, which has now sold in over six million units, and BioShock Infinite, which has now sold in nearly seven million units. Our company continues to benefit from creating the highest quality titles that attract new audiences well after their initial launch.
For the calendar year to date through June, Take-Two was the number one third-party publisher in the U.S. in terms of catalog unit sales per SKU across Xbox One, Xbox 360, PlayStation 4, and PlayStation 3. Take-Two had phenomenal success at this year's E3 show in L.A., which featured the first reveal of Rockstar Games' Grand Theft Auto V for PlayStation 4 and playable demos from 2K's extraordinary lineup. Our booth attracted thousands of attendees each day who waited hours to experience 2K's titles, which in total won more than 100 editorial awards and honors. Evolve won more than 50, including the coveted Best of Show award. We're incredibly proud of this achievement and believe that it bodes well for the title's February launch, which Karl will discuss shortly. I'd like to congratulate both Rockstar Games and 2K on their stellar performances at E3.
Fiscal 2015 is poised to be another strong year of revenues and profits for our organization, highlighted by a diverse array of new AAA releases and innovative digitally delivered offerings. With six new titles we've announced to date, we've disclosed our complete frontline release schedule for the current fiscal year. There are no longer unannounced titles assumed in our guidance. The outlook for our lineup is stronger than ever, which, coupled with our better-than-expected first quarter results and current business trends, enables us to maintain our guidance for the full fiscal year. Our ability to project these strong results illustrates how our company has been transformed into a diversified interactive entertainment enterprise with numerous successful franchises and meaningful profits from recurrent consumer spending.
Looking beyond the current year, Take-Two has the four key attributes that should enable us to maintain our positive momentum: the best creative talent in the business, the strongest portfolio of intellectual property, leading-edge technology, and ample cash. We have numerous titles in development, including both groundbreaking new intellectual properties and offerings from our established franchises. As a result, we're well-positioned to deliver non-GAAP profits every year for the foreseeable future and returns for our shareholders over the long term. I'll now turn the call over to Karl.
Thanks, Strauss. Today, I'll provide an update on our release schedule for the remainder of fiscal 2015. On October seventh, Visual Concepts will step onto the court to continue our NBA 2K franchise's reign as the number one basketball game in our industry. NBA 2K15 promises once again to set new benchmarks for sports realism and gameplay on both current and next-gen consoles and PC. Oklahoma City Thunder superstar, four-time NBA scoring champion, and 2014 NBA Most Valuable Player Kevin Durant will make his solo debut as the game's cover athlete, and this year's release will include more teams and players from the Turkish Airlines EuroLeague. In addition, the nationally renowned music artist and producer Pharrell Williams will curate the most extensive and unique soundtrack compilation in NBA 2K franchise history. 2K and Pharrell will unveil the soundtrack later this summer.
On October 14th, 2K will release "Borderlands: The Pre-Sequel" for Xbox 360, PlayStation 3, and PC. For the first time in the series, "Borderlands: The Pre-Sequel" will transport players to Pandora's moon, where they will experience intense gravity-bending gunfights using an array of all-new weapons and loot. Co-developed by Gearbox Software and 2K Australia, the title takes place in between the stories of the original "Borderlands" and "Borderlands 2" and will continue the franchise's tradition of innovative, cooperative multiplayer action. The Borderlands universe has become one of our company's most popular series, and we're thrilled to provide fans with even more ways to experience its incredible gameplay. On October 24th, 2K will build on the successful Civilization franchise, which has entertained audiences for nearly a quarter of a century and sold in more than 25 million units worldwide, with the release of "Sid Meier's Civilization: Beyond Earth" for PC.
The title will feature the core and tactical elements 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. Beyond Earth generated tremendous buzz at E3, winning more than 18 awards globally, including Best Strategy Game honors from the E3 Game Critics, Game Informer, IGN, Destructoid, and GameRevolution. On October 28th, 2K's WWE franchise will make its next-gen debut with the release of "WWE 2K15," which promises to take the series to new heights. 15-time WWE World Champion John Cena will be the cover athlete, and Sting, one of wrestling's most beloved competitors, will play a key role in the title's pre-order campaign.
This fall, Rockstar Games will launch the blockbuster hit "Grand Theft Auto V" on PlayStation 4, Xbox One, and PC, bringing across-the-board graphical and technical enhancements to the game's already breathtaking open-world experience. The current community of players will have the ability to transfer their Grand Theft Auto Online characters and progression to their choice of either PlayStation 4, Xbox One, or PC. All content and gameplay created for both Grand Theft Auto V and Grand Theft Auto Online will also be available for the PlayStation 4, Xbox One, and PC, with more to come. Rockstar Games will continue to support both Grand Theft Auto V and Grand Theft Auto Online with new offerings throughout the year, including regular content drops and limited-time event updates. The launch of Evolve, coming from 2K, has been moved to February 10th, 2015.
When we first acquired Evolve, we believed that Turtle Rock was creating something truly unique, which was poised to redefine the shooting genre. Coming out of E3, our instincts were proven correct, and the reaction to Evolve, including its numerous awards, speaks volumes about its potential in the market. We are encouraged by the overwhelmingly positive response from press and fans, and believe that extending development by a few months will allow the team enough time to fully realize their creative vision for Evolve while enabling us to take advantage of a favorable release window. We very much appreciate consumers' anticipation for Evolve, and we're confident that they will be well rewarded when the game launches in February. Our advanced development pipeline extends far beyond fiscal 2015.
We have numerous titles planned for release during fiscal 2016, such as 2K's Battleborn, an all-new intellectual property developed for next-gen and PC by Gearbox Software, the creative team behind our Borderlands franchise. Battleborn is a highly stylized blended genre game, which combines frenetic first-person shooting, cooperative combat, and an expansive collection of diverse characters to deliver a never-before-played hero shooter experience. The title was featured on the cover of the August issue of Game Informer, which provided an in-depth first look at the game. 2K will have more to share about Battleborn in the coming months. Next week, 2K will have a major presence at Gamescom, Europe's largest annual interactive entertainment event, which attracts more than 300,000 attendees, including media and consumers.
We will offer playable demos of NBA 2K15, WWE 2K15, Borderlands: The Pre-Sequel, and Evolve, as well as private press and retail showings of Sid Meier's Civilization: Beyond Earth. Heading into this holiday season, we will fully leverage our worldwide marketing and distribution expertise to create must-have moments at retail and also continue to complement our core titles with innovative digitally delivered offerings. Rockstar Games and 2K will roll out campaigns that span all forms of traditional and online media to usher in what we believe is one of our most diverse and strongest lineups ever. In closing, I'd like to join Strauss in thanking all of our colleagues around the world for their contributions in delivering a strong start to the year. I'll now turn the call over to Lainie.
Thanks, Karl, and good afternoon, everyone. Today, I'll review our results for the fiscal first quarter and then discuss our outlook for the fiscal second quarter and full year 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 fiscal first quarter, net revenue increased 5% to $151.6 million. This exceeded our outlook range of $120 million-$135 million, due primarily to the continued strong performance of Grand Theft Auto V and Grand Theft Auto Online. Digitally delivered revenue grew 43% to $106.4 million.
The largest contributors were the Grand Theft Auto series, the NBA 2K franchise, and offerings for Borderlands 2. Approximately 60% was derived from recurrent consumer spending, including virtual currency, add-on content, and online games. Catalog sales accounted for $82.7 million in net revenue, led by the Grand Theft Auto series, Borderlands 2, Sid Meier's Civilization V, and BioShock Infinite. Gross margin increased 22.7 percentage points to 58.1% due to the absence of a $29 million impairment of capitalized software development costs, which was recognized during the first quarter last year. Operating expenses were $95.8 million, up by $2.2 million due to higher personnel expense and depreciation. Interest and other expense was $2.3 million, and non-GAAP net loss narrowed to $11.2 million or $0.14 per share as compared to a loss of $47.1 million or $0.54 per share in fiscal first quarter 2014.
This result was better than our projected loss of $0.25-$0.35 per share. On a GAAP basis, we reported $125.4 million and a loss from continuing operations of $35.4 million or $0.45 per share. Turning to some key items from our balance sheet at June 30, 2014, as compared to March 31, 2014. Our cash and short-term investments balance decreased to $841.4 million. Our accounts receivable balance decreased to $43.2 million, primarily reflecting the collection of receivables from our fourth quarter and holiday sales. Inventory decreased to $23.1 million due primarily to continued sales of Grand Theft Auto V. Software development costs and licenses increased to $265.6 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 2015, which is provided on a non-GAAP basis.
Starting with the full year, we are reiterating our financial outlook, including non-GAAP net revenue of $1.35 billion-$1.45 billion and non-GAAP net income per share of $0.80-$1.05. The majority of our revenue is expected to come from new releases, including NBA 2K15, Grand Theft Auto V for PlayStation 4, Xbox One, and PC, Evolve, WWE 2K15, Borderlands: The Pre-Sequel, and Civilization: Beyond Earth, and catalog sales led by the Grand Theft Auto series. We expect the revenue breakdown from our labels to be roughly 40% from Rockstar Games and 60% from 2K. We expect our geographic revenue split to be about 60% U.S. and 40% international. We expect gross margins in the mid-40s. Total operating expenses are expected to increase by approximately 4%, driven primarily by rent for larger studio locations, personnel expense due to increased headcount, and higher depreciation expense.
Selling and marketing expense is expected to be about 17% of net revenue based on the midpoint of our outlook range. We project interest in other expense of approximately $9 million, tax expense of about $37 million, and weighted average fully diluted shares of approximately 114 million. Interest on the convertible note net of tax is approximately $7.4 million, which will be added to net income to calculate net income per share under the if-converted method. As a result of working capital needs, we continue to expect our operations to use a modest amount of cash in fiscal 2015. However, we expect to generate cash from operations in fiscal 2016 and to be net cash flow positive over these two fiscal years.
Turning to the second quarter, we expect non-GAAP net revenue to range from $95 million-$110 million and non-GAAP net loss per share to range from $0.60-$0.70. Revenue in the second quarter is expected to be driven by catalog sales led by the Grand Theft Auto series, NBA 2K14 and Borderlands 2. We expect second quarter gross margins in the low to mid-60s due to a higher mix of digitally delivered revenues in the period. Total operating expenses are expected to decrease by approximately 27%, primarily due to lower marketing expense for Grand Theft Auto V as compared to the second quarter last year. Selling and marketing expense is expected to be about 55% of net revenue based on the midpoint of our outlook range.
Our second quarter outlook also reflects interest in other expense of approximately $2 million, a tax benefit of $2 million, and weighted average shares of approximately 80 million. Additional details about our financial outlook are in the press release, reporting our first quarter results, which was issued shortly before this call. In closing, we are pleased that fiscal 2015 is off to a solid start with better-than-expected first quarter results. Our industry-leading creative and intellectual property assets, coupled with an ample reserve of cash, provide Take-Two with a strong foundation to continue to execute our proven strategy and deliver positive results both this year and over the long term. Thank you. I'll turn the call back to Strauss Zelnick.
Thanks, Karl and Lainie. On behalf of our entire management team, I'd like thanks for their hard work. To our shareholders, I'd like to express our appreciation for your continued support. We'll now take your questions. Operator?
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Drew Crum with Stifel. Please proceed with your question.
Thanks. Good afternoon, everyone. Want to understand what the impact of moving Evolve from the fall to the February timeframe is on revenue guidance. You guys beat your first quarter guidance, you're reiterating for the full year. Just want to understand what impact that has on how you're thinking about revenue for the year.
For Evolve, we don't give out our guidance on a title-by-title basis. The title did move, but we had a lot of movement in our guidance from this quarter versus when we previously gave out our initial guidance. We beat Q1. We also adjusted all our estimates for our titles for our pipeline that's coming out in fiscal 2015. There's also some changes to our release schedule, as you mentioned.
Okay, fair enough. Some of your competitors have seen a weakness on new releases on past gen systems. Just want to get a sense as to what you're anticipating for Borderlands, which will not be available on next gen systems.
Yeah. We've definitely seen others' reports largely on catalog, and I think our view is that if you give consumers what they want, they come out for it. Our catalog sales have done very well. It's what we announced in this quarter. It's one of the key reasons that we were able to beat in the quarter. We have a lot of faith in the Borderlands franchise. There's still a huge installed base of consumers. Borderlands is beloved. Borderlands 2 has sold something like 10 million units to date, so we have very high hopes for the Pre-Sequel for current gen platforms and PC indeed. It'll be reliant on quality, and we expect to deliver a really high-quality game.
Right. I think one of the differences that we may have from our competitors is this is a fresh, new experience that's built for this current gen system, which has not been the case with our competitors. Typically, the weakness that the competitors have seen is on when you're coming out with both titles on current gen and next gen, and there's not necessarily a distinction between the two.
Got it. Okay. One last question. I apologize if I missed this in your remarks, Karl, but is there anything contemplated in the fiscal 2015 guidance with respect to DLC for Grand Theft Auto V?
We don't have anything in there for Grand Theft Auto V. There may be some free downloadable content that's given out during the year, but anything that brings revenue to the top line, there's been nothing announced to date.
Okay. Thanks, guys.
Our next question comes from the line of Edward Williams with BMO Capital Markets. Please proceed with your question.
Hi, everybody. This is Thomas Andrews standing in for Edward tonight. Just a couple quick questions. One, can you go into a little bit of detail about the revenue breakdown in terms of what was generated from your 2K portfolio versus what was generated by the Rockstar portfolio? Then just one housekeeping item. Can you go through the individual stock option expense lines for the quarter?
Yeah, we wouldn't normally go through that kind of detail on the call. You can follow up separately with Hank if you wish, and Lainie can respond to the 2K versus Rockstar split in the quarter.
Right. For Q1, Rockstar was approximately 45%, and 2K was 55%.
Great. Thank you very much.
As a reminder, ladies and gentlemen, if you would like to ask a question, press star one on your telephone keypad. If you are using a speakerphone, you may need to pick up your handset before you press the star keys. Our next question comes from the line of Brian Fitzgerald with Jefferies. Please proceed with your question.
Thanks, guys. When you look at the nice digital revenue you had, plus 43% year-over-year, you mentioned in the release it was driven by GTA, NBA, and Borderlands. Could you maybe give us some of the mix there? I know you highlighted GTA virtual currency and NBA, but maybe some color on mix split, including Borderlands. Strauss, you've had great success with NBA 2K. You highlighted the 7 million benchmark. How do you think about entering additional sports categories going forward? Obviously, you're doing very well with WWE right now. Thanks.
Yeah, we appreciate the question. We don't break out how the titles are doing specifically, and I know people would like that kind of color, but we're still in the middle of exploiting these titles and delivering these fantastic experiences to consumers, so it's still a work in progress. However, we are very pleased with how all of it's going. Very pleased with our current consumer spending in general, very pleased with virtual currency sales, very pleased with Grand Theft Auto Online's metrics across the board, and very pleased with how NBA 2K is doing. It's an excellent story across the board, but we don't break it out title by title. In terms of our sports business, thank you for the compliment disguised as a question. Happy to have it. Naturally, we're trying to grow the business, and we're doing so selectively.
What we found is that when we're a leader in the space, we do really well. When we're an also-ran in the space, we don't do well. One of the things that we try to do around here is start from the point of delighting audiences and putting out the highest quality products and then thinking about making money. Equally, we really object to losing money. The bulk of what we do around here is owned intellectual property. By definition, a sports business is a licensed property, so we have to be exceedingly selective in our licenses, and the company's had some history around that. Generally speaking, I think this is a very disciplined, sometimes to a fault, management team, and that applies to the sports business.
I don't want that to be confused with a lack of ambition, because indeed, we're very ambitious to grow the enterprise.
Great. Thanks, guys.
As a reminder, ladies and gentlemen, if you would like to ask a question, press star one on your telephone keypad. Our next question comes from the line of Zachary Arrick with SunTrust. Please proceed with your question.
Hi. Could you tell us the reason for the delay, the pushback in the release date for Evolve? Thank you.
Absolutely. We've primarily decided that the title deserves and should have more time to be polished so it can reach its absolute optimal state before we release it. Historically, we've always benefited from giving the creative teams more time to polish the titles. We've never regretted it. It's not a meaningful amount of time. The title's still coming out in the fiscal year. We're really excited about the title. Coming out of E3 where we won best of show, it felt like the right thing to do is make absolutely sure this title can be its very best. At the same time, I do believe February is a pretty terrific release window.
It's not at all crowded, and we will benefit from the fact that there are a lot of holiday sales of consoles, so the install base will be bigger, and it should be pretty open time to release. If you look at our history over the past seven years, we're a company that's often released major titles outside of the holiday season. In fact, we typically are not very active in the traditional holiday season, so having such a robust release schedule for October is somewhat unusual for us. We're really excited about it. I, for one, am glad that we have Evolve coming in February for any number of reasons.
Thank you.
Our next question comes from the line of Justin Post with Merrill Lynch. Please proceed with your question.
Yes. Hi, this is Ryan calling in for Justin. Just wanted to go back to GTA Online real quick. If you could talk about maybe what's the content that's probably coming out in the next quarter or for the rest of the year that we should maybe keep an eye on. If you could, talk about GTA Online and what that could be as a piece of that 40% of revenue that'll come from Rockstar this year, then I have one follow-up.
Yeah, we're not really able to give much more color on GTA Online. It's not for want of excitement. We have a great deal of excitement, but when we start getting into content and marketing announcements, that's really driven by the label. We have said, though, and I want to reiterate that the release of GTA Online has been extraordinarily favorable for consumers and for us. We're immensely grateful to Rockstar for the incredible product that they delivered, the incredible consumer experience, and we remain optimistic about what GTA Online can be, both for current gen and for next gen.
Okay, that's fair. Then for Lainie, maybe. Can you remind us what you said about the quarterly run rate for the recurring revenue in GTA Online? Whether it's reasonable to expect that once it comes out on next gen, if that quarterly run rate should see a step function up or not?
Ryan, we didn't give out specifically for GTA Online. We did say that 60% of the overall digital came from the recurring consumer spending, and that includes our virtual currency, add-on content, and online games.
We're not making any projections about the run rate of anything that we've put out before.
Okay, great. Thank you, guys.
Mr. Zelnick, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.
Well, thank you so much for joining us. Obviously, we're thrilled to have beaten our projected outlook for something like eight quarters in a row and to reiterate our financial guidance for the year. We have a lot of great things coming up, and we're grateful to the shareholders for their support. Thanks for joining us today.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time.