Greetings, ladies and gentlemen, welcome to the Take-Two third quarter fiscal 2014 earnings conference call. At this time, all participants are in a 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, Mr. Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications for Take-Two. Thank you, sir. You may begin.
Good afternoon. Welcome, thank you for joining Take-Two's conference call to discuss its results for the third quarter of fiscal year 2014 ended December 31st, 2013. 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, 2013, and Form 10-Q for the fiscal quarter ended September 30th, 2013. 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. I'm pleased to report that our business continued to thrive during the fiscal third quarter, and we again delivered better than expected results. This was driven by robust holiday demand for Grand Theft Auto V, the record-breaking launch of NBA 2K14, the successful release of WWE 2K14, and strong growth in revenues from digitally delivered content. While others in our industry have experienced softness in current gen sales, we continue to benefit from significant demand for our titles, reflecting consumers' appetite for the highest quality entertainment. Grand Theft Auto V continues to expand its audience around the world, demonstrating how Rockstar Games have taken their series and our industry to new heights for innovation and excellence.
Upon release, the title shattered entertainment records, selling through $800 million in 24 hours and over $1 billion in only three days. It was the best-selling video game of 2013, according to the NPD Group. To date, Grand Theft Auto V has sold in more than 32.5 million units worldwide, and demand remains high as millions of consumers enrich their experience through the dynamic and evolving world of Grand Theft Auto Online, which I'll discuss in more detail shortly. The success of Grand Theft Auto V is only part of Rockstar Games' unparalleled track record. To date, the label has sold in nearly 250 million games worldwide across multiple hit series. 2K built upon their legacy of delivering the highest rated and top selling basketball video game with their current next gen releases of NBA 2K14.
The title has become the fastest selling release in the history of our NBA 2K franchise, with sell-in to date of more than 5 million units across console and PC. I'd like to congratulate the team at Visual Concepts, who simultaneously created two outstanding products for current and next gen platforms. Our WWE franchise has quickly proven to be a successful addition to our portfolio. Sales of WWE 2K14 have exceeded our expectations, and the title is being supported with add-on content, including a season pass featuring many of fan favorite WWE Superstars and Legends. We believe there's a meaningful opportunity to grow this series by further leveraging 2K's marketing power and development expertise. Revenue from digitally delivered content grew 42% year over year to $132.8 million. Nearly half that revenue was derived from recurrent consumer spending, including virtual currency, add-on content, and online gaming.
Creating opportunities to drive ongoing engagement with our titles after release is a key strategic focus for our company and is becoming an important driver of additional revenue and profits. It also helps to strengthen our results between frontline releases while providing additional entertainment to consumers. Approximately 70% of consumers who've played Grand Theft Auto V while connected to the internet have played Grand Theft Auto Online since its launch on October 1st. As a result, Grand Theft Auto Online was the single largest contributor to our digitally delivered revenue in the third quarter. While it's still early, we're highly enthusiastic about the future of Grand Theft Auto Online as its global audience continues to grow. Online play contributed to the success of NBA 2K13. We've seen continued growth with this year's release of NBA 2K14.
The majority of NBA 2K14 fans are actively engaged in online connected experiences, including multiplayer gaming. In particular, consumers are buying virtual currency to customize their players with clothing and abilities and are also forming teams with friends to play in online competitions. Add-on content is also a key component of recurring consumer spending. During the third quarter, we released successful downloadable content for BioShock Infinite, Borderlands 2, Sid Meier's Civilization V, and WWE 2K14. Borderlands 2 is a prime example of how we're able to generate substantial revenue and profits from add-on content over an extended period. In the 16 months following the title launch, we released nine substantial downloadable offerings, dozens of smaller character customizations, and we plan to release more downloadable content in the coming months. This is in addition to packaged good add-on packs, and most recently, a Game of the Year edition.
The popularity of add-on content for Borderlands 2 was an important contributor to the titles becoming the highest-selling release in the history of 2K, with more than 8.5 million units sold to date. Our online projects in Asia, particularly NBA 2K Online in China, are also generating growth in recurrent consumer spending and contributing to our results. We'll continue to focus on developing additional offerings that promote engagement with our titles beyond initial release. This will both deepen our relationships with consumers and boost revenue and profits over time. In addition to recurrent consumer spending, full game downloads across console, PC, and mobile platforms contributed to the growth in our revenue from digitally delivered content. During the third quarter, Rockstar Games released Grand Theft Auto: San Andreas for a variety of mobile platforms, including iOS and Android.
Our ability to bring our popular catalog titles to mobile platforms enable us to grow our audience and generate incremental revenue and profits with modest development costs and virtually no marketing spend. As I've said many times before, being good is simply no longer good enough. To succeed in our industry, one must aspire to and deliver greatness. Our positive momentum over the past year speaks to our focus on consistently delivering hits. I'm particularly proud that Take-Two was the top video game publisher of 2013, according to the NPD Group. This is a tremendous achievement, and I'd like to congratulate Rockstar Games, 2K, and our entire Take-Two team for making this happen. Turning to our balance sheet, we ended the third quarter with cash of almost $1 billion. We're committed to driving long-term shareholder value, including by returning capital to our investors.
To that end, we repurchased $277 million of our stocks during the third quarter. We'll continue to explore ways to create value through capital deployment, both by investing to grow our business and potentially returning additional cash to shareholders. As a result of our better-than-expected third-quarter results, we're increasing our full-year outlook for fiscal 2014, which is poised to be a record year for our company, with projected non-GAAP net revenue of nearly $2.4 billion and earnings of more than $4 per share. Looking ahead, we have a robust pipeline of both new intellectual properties and offerings from our proven franchises in development, including more than 10 unique titles for the next-generation consoles. We believe that the initial success of Xbox One and PlayStation 4 bodes well for our industry and foreshadows what promises to be a vibrant hardware cycle.
In addition to capitalizing on these new consoles, we're continuing to invest prudently in emerging platforms and business models that complement our core focus. With a proven strategy, world-class creative teams, the strongest portfolio of owned intellectual property in our industry, cutting-edge technology, an unwavering commitment to quality, and a solid financial foundation, we're positioned to deliver non-GAAP profits in fiscal 2015 and every year for the foreseeable future. We're committed to delivering value for our customers 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 development pipeline. With "Grand Theft Auto V," Rockstar Games has redefined the term blockbuster, not just for gaming, but also for the entire entertainment industry. Since its launch in October, millions of consumers have engrossed themselves in "Grand Theft Auto Online," which has quickly become a living, breathing universe that continues to grow. In addition to new gameplay and in-game items released by Rockstar Games, the creator tools enable players to enhance their gameplay experience by developing their own content. Through this functionality, the player community has already created and published over 2 million death matches and races. Consumers can look forward to more content from "Grand Theft Auto Online" in the future.
In addition to supporting "Grand Theft Auto Online," Rockstar Games plans to release substantial story-driven downloadable add-on content for "Grand Theft Auto V." They'll have more to say about this in the coming months. For those who have not yet experienced the award-winning "Sid Meier's Civilization V" or "XCOM: Enemy Unknown" from Firaxis Games, 2K will launch complete editions for each title for the PC. Featuring the full game plus all previously released add-on content, these editions represent a terrific value for consumers and another example of how we extend the lives of our franchises over time. We're also pursuing new opportunities to leverage our successful catalog offerings. 2K recently entered into a partnership with Bethesda to create 2 bundles featuring each publisher's renowned titles in a single package.
On February 11th, 2K will release the "Borderlands 2" and "Dishonored" bundle, and "The Elder Scrolls V: Skyrim" and "BioShock Infinite" bundle, each available for the Xbox 360, PS3, and PC. Also coming up, 2K will support "BioShock Infinite" with the release of "BioShock Infinite: Burial at Sea Part 2," the second add-on campaign set in the underwater city of Rapture before its fall. As mentioned by Strauss, we have a strong development pipeline, including more than 10 unique titles for next-generation consoles, with multiple releases planned for fiscal year 2015. Last month, 2K and Turtle Rock Studios, creators of the cooperative shooter classic "Left 4 Dead," unveiled "Evolve," an exciting new intellectual property that is poised to be a generation-defining multiplayer experience.
Evolve, which will be available this fall for Xbox One, PlayStation 4, and PC, expertly blends cooperative and competitive multiplayer experiences as a team of 4 hunters face off against a player-controlled monster. Set on a futuristic, deadly alien planet, gamers hunt their prey in adrenaline-pumping 4 versus 1 matches. Players will experience Evolve as either a first-person shooter when playing cooperatively as the 4 hunters or in the third person when playing as a monster, providing a unique gameplay experience. 2K has kicked off the pre-order campaign for Evolve, featuring the Monster Expansion Pack, which includes the Savage Goliath Skin at launch and a new monster character as soon as it becomes available after the game's release.
In addition, during fiscal 2015, consumers can look forward to exciting next-generation releases from our NBA 2K and WWE franchises, as well as other unannounced titles that promise to raise the bar for excellence. We'll have more to share about our titles in development throughout the next several months as we head into E3. As we enter the final month of fiscal year 2014, we're proud of our accomplishments and proven ability to set new standards for creativity and innovation. Looking forward, we are more enthusiastic than ever about our outlook to continue to deliver our industry's most groundbreaking products, which will translate into revenue and profits for our shareholders. In closing, I'd like to join Strauss in thanking all of our colleagues for their contributions to our continued success. I'll now turn the call over to Lainie.
Thanks, Karl, and good afternoon, everyone. Today, I'll review our results for the fiscal third quarter and then discuss our updated outlook for fiscal 2014 and our initial outlook for the fiscal fourth quarter. 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 third quarter, net revenue increased 90% to $767.7 million. This exceeded our outlook range of $650 million-$700 million due primarily to the continued success of Grand Theft Auto V, the record-breaking launch of NBA 2K14, and the strong performance of Grand Theft Auto Online. Revenue from digitally delivered content grew 42% year-over-year and accounted for $132.8 million of net revenue.
The largest contributors were the Grand Theft Auto series, the NBA 2K franchise, and offerings for Borderlands 2 and BioShock Infinite. Catalog sales accounted for $113 million of net revenue led by Borderlands 2, the Grand Theft Auto franchise, XCOM: Enemy Unknown, BioShock Infinite, and Civilization V. Gross margin decreased 3.4 percentage points to 44.7%, due primarily to higher internal royalties. Operating expenses were approximately $127 million, up by about $16 million, due primarily to higher marketing expenses to support our third-quarter releases, continued marketing spend for Grand Theft Auto V, and higher personnel expenses due to our increased headcount. Interest and other expense was $0.7 million, and non-GAAP net income was $210.7 million, or $1.70 per share, as compared to $78.8 million or $0.67 per share in fiscal third quarter 2013.
This exceeded our outlook range of $1.20-$1.35 per share due primarily to our better-than-expected results from operations. On a GAAP basis, we reported revenue of $1.86 billion and net income from continuing operations of $578.4 million or $4.69 per share. Turning to some key items from our balance sheet at December 31st, 2013, as compared to September 30th, 2013. Our cash balance increased to $972.2 million. Our accounts receivable balance decreased to $189.5 million, primarily reflecting collection of receivables associated with the launch of Grand Theft Auto V near the end of the second quarter. Inventories decreased to $45 million, primarily due to the launch of NBA 2K14 in early October and shipments for replenishment orders of Grand Theft Auto V. Software development costs and licenses decreased to $193.8 million, reflecting the amortization of development costs for our fiscal 2014 releases.
We'll review our financial outlook for the full year and fourth quarter fiscal 2014, which is all provided on a non-GAAP basis. We are increasing our financial outlook for fiscal 2014 primarily to reflect our strong third quarter results and lower share count due to our repurchase of 16.24 million shares in November. We now expect non-GAAP net revenue to range from $2.35 billion-$2.38 billion and non-GAAP net income to range from $4.15 per share-$4.25 per share. These would be record results for our company. Turning to the details of our full-year outlook, we expect the revenue breakdown from our labels to be roughly 70% from Rockstar Games and 30% from 2K. We expect our geographic revenue split to be about 50% U.S. and 50% international. We expect gross margins in the low 40s.
Total operating expenses are expected to remain approximately flat from the prior year. Selling and marketing expense is expected to be about 10% of net revenue based on the midpoint of our outlook range. We project interest and other expense of approximately $11 million, tax expense of about $14 million, and weighted average fully diluted shares of approximately 121 million. This reflects weighted average basic shares of approximately 84 million, 11 million participating shares for unvested stock-based compensation awards, and 26 million shares representing the potential dilution from our convertible notes under the if-converted method of accounting. Turning to our outlook for the fourth quarter of fiscal 2014, we expect non-GAAP net revenue to range from $170 million-$200 million, and non-GAAP net income to range from breakeven to $0.10 per share.
The majority of our revenue in the fourth quarter is expected to come from NBA 2K14, Grand Theft Auto, Grand Theft Auto V, Grand Theft Auto Online, Borderlands 2, and WWE 2K14. We expect fourth quarter gross margins in the low 50s. Total operating expenses are expected to decrease by approximately 16% from the prior year's fourth quarter, driven primarily by lower selling and marketing expense. Selling and marketing expense is expected to be about 16% of net revenue if in the midpoint of our outlook range. Our fourth quarter outlook also reflects interest in other expense of approximately $2 million, tax expense of about $1 million, and weighted average fully diluted shares of approximately 115 million.
This reflects weighted average basic shares of approximately 77 million, 12 million participating shares for unvested stock-based compensation awards, and 26 million shares representing the potential dilution from our convertible notes under the if-converted method of accounting. Today, Take-Two stands on the strongest financial foundation in the history of our company. This was achieved through our ability to balance leading-edge creative endeavors with a disciplined approach to capital investment. We are confident that our continued focus will enable Take-Two to deliver profits and returns for our shareholders over the long term. None of this would be possible without the hard work of our entire team, I'd like to thank you for your dedication to the company. Thank you. I'll turn the call back to Strauss Zelnick.
Thanks, Karl Slatoff. On behalf of our entire management team, I'd like to thank our associates for their ongoing commitment to excellence. To our shareholders, I want to express our appreciation for your continued support. We'll now take your questions. Operator?
Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd 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. Our first question comes from the line of Justin Post with Merrill Lynch. Please proceed with your question.
Thank you. Can you talk a little bit about or kind of just remind us of what you said about the GTA Online usage? I think you said 70% of the people who are online connected have played online. Repeat that. What are people doing in there and paying for so far, and what's your outlook going forward? Thank you.
Justin, it's Karl. What we said is that 70% of the folks who have played the game with an internet connection have played GTA Online.
Okay.
Okay.
What are they paying for currently and how do you see the opportunity going forward?
Well, first of all, we're very optimistic about the opportunity. Things are going very well, and we're very happy with how things are going in GTA Online. Lots of great content out there already and a lot of great content on its way. We obviously have a very positive outlook for the future. In terms of what they're doing online, I would have expected that you would have played it by now. Otherwise, there are a lot of different ways that you can enjoy the content online. There are predetermined death matches, your standard death match, your races. In terms of buying, we have the Shark Cards. In order to experience some of the game, you can buy Shark Cards, and that allows you to unlock certain content, items that you can buy, et cetera. It's a standard online transaction model that you would see.
Okay, great. When you think about your big franchises, moving them to mobile over time, how much untapped opportunity do you see for the company? Thanks.
We don't really distinguish between mobile and not mobile. Our view is that a platform that a consumer wants to use to experience the best in interactive entertainment is good for us. The only question is, what are the processing limitations or graphic limitations? Which is why we've put out some of our older titles on tablet, but not as many of our newer titles because of the processing limitations or the power of those tablets as they currently exist. If you believe in Moore's Law, and I do, then you believe that tablets will be tantamount to PCs pretty soon. I have every reason to believe that if that's where people want to consume video games, that's where we'll be.
Great. Thank you.
Thank you. Our next question comes from the line of James Hardiman with Longbow Research. Please proceed with your question.
Thanks for taking my call, and congrats on another great quarter. Just to circle back to the last couple of questions on GTA Online, you had a couple of starts and stops with respect to the online currency for GTA Online. Do you think that you've made up for any sort of lost revenue? Can you just take us through the timing of that, when that went sort of back online? Was that towards the end of the quarter? Is there maybe some catch-up to happen here in the March quarter?
Yeah, I've made it plain that we have been learning as we go along in this area. Our primary goal is to delight consumers and create a great experience. As you know, GTA Online is a free-to-play experience, and there's opportunities for recurrent consumer spending within the game. No obligation, of course. We've sold 32.5 million units of Grand Theft Auto V We've enjoyed an extraordinary economic result. The starting point for that economic result is delighting consumers, giving them a fantastic experience, and that's our focus in GTA Online. The reason that we offer an opportunity to spend money in the game is that's coordinated with a great experience. We're not making decisions in order to extract value. We're making decisions to delight consumers, and that includes creating value. Yes, we had some issues with the currency. Those issues have been addressed.
We're not really focused on whether there's catch-up or anything of the sort. As long as people keep loving "GTA Online," it's going to be great for us.
Great. Then I guess along those same lines, I don't know how much you're sort of querying your user base or following any sort of metrics that would just maybe give us some insights. Whatever color you might have with respect to just how sustainable you think this "GTA Online" experience can be. Maybe through the release of other high-octane games that have come out within the industry, did we see a drop in the number of people that were online? How long can this go?
James, I'm so thrilled to be asked to answer a how-high-is-up question because it's sort of novel for us around here. Look, we're thrilled. We're just thrilled. We certainly are following metrics very carefully, and we're growing our expertise every day. We made a claim that we prefer to expend resources after we see revenues, not before. It's protected us greatly. We are very disciplined, and that means we are learning as we go. The watch word here is about delighting consumers and keeping them engaged, not about monetization. The monetization comes with the engagement. My own view is I feel very optimistic about "GTA Online," and I think there's plenty more opportunity, and we've made no bones about the fact that we have expectations for "GTA Online" in the fourth quarter, for example.
Clearly, we have expectations going forward, but we're not at a point yet where we want to share the metrics.
Very helpful. I guess just last question, Strauss, the performance of your company over the past six months, certainly since GTA has come out, has been through the roof. Hopefully tomorrow will be a different story, but your stock has been essentially sideways over that time. I guess, are you surprised that your stock hasn't done more? Seems like you've gotten out a lot more and talked to investors. What would they like to see to reward your shares more commensurately with your performance? I guess, are there two ways to skin this cat? You're sitting here with cash that represents half the market cap of your company. What's in tap? What could you potentially do to get people more excited about the shares, just given your cash position? Thanks.
I've never met a CEO who didn't think his or her stock was undervalued. We're not in the business of pumping stock. We're in the business of trying to be the most creative, the most innovative, and the most efficient entertainment company that exists. I'm really proud that in the last seven years, every year, we've launched a new multi-million unit selling franchise. I'm really proud that we have the best collection of owned intellectual property in the business. I'm incredibly gratified that I believe we have the top collection of creative talent within our four walls and the team to be happy to work here, and moreover, that they love following their passions. The collection of that strategy and that execution, as Lainie said, has yielded an extraordinary financial result.
We sit here today, once again beating our guidance for the sixth quarter in a row, once again increasing our outlook now to $4.15-$4.25 a share. I sit here with the ability to say in confidence that we expect to be profitable in the next fiscal year on a non-GAAP basis and profitable on an ongoing basis for the foreseeable future. Finally, we have nearly $1 billion in cash, and based on the way we account for our convert, one could argue that's in the context of no debt, since we account for our converted notes returned in equity. That's an amazing place to be in what is a relatively short time since we came to this party, and we're immensely grateful for it. What do I surmise?
Look, sometimes the market takes a long time to come to a view of where we are and where we're going. Once I asked one of our very sophisticated investors why the stock had gone down, and he said to me, "More sellers than buyers." I'm convinced that if we keep executing on this vision and our entire team stays focused on what they're passionate about, and we all work really hard, I'm convinced that there will be a narrowing gap between our reality and how the market sees us.
Agreed. Thanks, Strauss.
Thank you. Our next question comes from the line of Eric Handler with MKM Partners. Please proceed with your question.
Yes, thanks for taking my question. Just a couple questions for you. With regards to "GTA Online," you said 70% who have played with internet connection have played "GTA Online." Just curious, what percentage of that 70% have actually been monetized with some type of microtransaction? Then secondly, with regards to your balance sheet, if you just look at it from a net cash perspective, and let's treat the converts as debt, you've got over $500 million of cash. Is there a certain amount of cash that you want on hand at all time for operational purposes? It looks like you really didn't buy back any more stock after the announcement that you made in late November about repurchasing the Icahn shares and then 4-point some odd million shares in the open market. Have you bought any since that time?
Yeah. We're not talking about the % that have monetized. We're not disclosing those metrics, and that is primarily because this is still a work in progress. In terms of the balance sheet, there absolutely is a base amount of cash on hand in the several hundred million dollar range to make sure that we can continue to make and market the highest quality products. With that regard to the fact that now and then things don't go our way, we're very fortunate that we've been profitable a lot lately, and we've been able to be profitable in multiple years without a frontline release of "Grand Theft Auto." That was our stated strategy. Of course, when we do have a frontline release of "Grand Theft Auto," we've been very fortunate with those results as well. It's been a lot of good news around here.
Not everything always goes our way. We have had disappointing releases, we are a pure play entertainment company, there's an element of volatility baked into that. The ability to play another day, the ability to bet on your releases, the ability to spend a good deal of money in development and marketing is highly correlated with success in entertainment, which is why across all entertainment content businesses, I've been involved with all of them over the course of my career, the rich get richer, if they can keep delivering. I'm fond of saying, you've heard me say it before, arrogance is the enemy of continued success. We don't take anything for granted. We don't claim continued success as a matter of right.
Our team, honestly, when I talk to our creative folks about how wonderful a Metacritic rating was or how great something went, inevitably what they explain to me is not how great they are, but first they tell me that it was the team's responsibility, not theirs. They disclaim responsibility because that's our culture. Then the second thing they do is point out the things that didn't go as well as they wanted in the areas that we need to improve in. It's that culture that I think protects us. Even so, now and then we get things wrong, and we need to be protected so our team can always feel safe in investing behind their passions and can feel safe in marketing our products in the highest class way possible.
In terms of capital in excess of that amount, I think we agree we have that now, we do have some converts out there. It's nice to have some flexibility in terms of redemption, even though we account for them as though they'll be redeemed in equity. We have purchased $277 million of stock, though we have no new announcements on that since those purchases. We've made no bones about the fact that we'd be very interested in highly accretive M&A, let me emphasize highly accretive, by that I do not mean speculatively so, I mean actually so. We'll continue to grow organically in a disciplined way. Given that we are in a high-risk business, we are very focused on risk mitigation.
We are focused on, in a measured way, looking for strategic opportunities to grow inorganically, we absolutely have our eyes wide open about returning more capital to the shareholders.
Okay. Just one quick follow-up question. When you look at a successful title or any of your titles, and the DLC that you've launched above and beyond that, I wondered if you could just give a range of sort of the incremental upside that you get from a franchise above and beyond the physical release and on average, sort of what that looks like.
It is a general focus. We haven't given out more color because the numbers are all over the place. As you'd imagine, and it sounds sort of obvious, but it's worth mentioning, the more successful the original release, the more successful the downloadable content, the more important recurrent consumer spending becomes for the title.
Okay. Thanks, Strauss.
Thank you. Our next question comes from the line of Michael Olson with Piper Jaffray. Please proceed with your question.
Hey, good afternoon. I just had one quick one here on Evolve. You provided some details on the game, can you maybe give us an idea if this is really going to be kind of the one big non-recurring title that you plan to launch in 2014?
I'm sorry, what do you mean by non-recurring title?
As in like NBA 2K is an annual title.
Oh, I see. Yep. Well, like I said, we said before, we've announced that we've got unannounced titles in development at this point. We haven't given any other disclosure to that, obviously, that is one large one that we've announced for the year, but other than that, we've got nothing more to say.
Okay, thank you.
Thank you. Our next question comes from the line of Daniel Ernst with Hudson Square Research. Please proceed with your question.
Yes, thanks for taking my call. Two questions, if I might. One, if you look across the cycle that's pretty much just done, although GTA is keeping the current cycle going for those gamers, what percentage of your revenues over the course of the last cycle came from GTA? And given, compared to the last cycle where you didn't have a BioShock, a Borderlands, and didn't have as successful a Red Dead, can you kind of give us a scale of how that distribution changed cycle to cycle and where it might go in the new one?
Secondly, Strauss, relative to your comments on making accretive M&A, if you look over the last four or five years, there's been a lot of M&A in video game land, and I think most people would agree that not a lot of it has been accretive, at least not for very long. As you look at opportunities, and given your experience in broader media, would a deal have to be in video games itself, or might you look to broaden the scope of what Take-Two does in terms of the mediums it serves?
We don't have the numbers in front of us in sort of comparing this launch and our other titles to the last launch, Grand Theft Auto IV and other titles. It'd be very hard to do that apples to apples because obviously it's not as though we have all of the release schedules of all the titles in lockstep. We do have a lot more big franchises today than we had when we launched Grand Theft Auto IV. We're very grateful for that because, as I said, we've launched at least one new intellectual property that's sold millions of units every year since 2007, I believe. I think you can safely assume that the % is lower now than it was before. Beyond that, I don't think we can give much color. In terms of M&A, look, you're 100% right. The track record of the industry is not wonderful.
Although Activision has done some very clever transactions, I would argue, their stock price reflects that. Across the board, it hasn't been a pretty story. We just don't believe in pie in the sky. We barely believe pie right in front of us unless we're eating it. I think the answer is strategy really matters. Execution may matter more than strategy. Would we contemplate other forms of digital entertainment in addition to pure video game entertainment? We would contemplate that, beyond that, we don't have much else to say now and certainly nothing to announce.
Thank you.
Thank you. Our next question comes from the line of Colin Sebastian with Robert W. Baird & Co. Please proceed with your question.
Thank you, and congratulations on the quarter. First off, if you could provide any perspective on the efforts required to bring a franchise like GTA V over to other platforms, if that's more or less a traditional port, or does Rockstar have somewhat higher standards that require something more in-depth in terms of extensions? On the digital strategy, I know as a content company, you have to decide how much infrastructure and servers and networking to build yourselves versus relying on others, in your case, like Sony and Microsoft. My question is looking ahead, based on your experiences to date, do your platform partners have those pieces to serve your content as you like to your customers? Or do you foresee any need to build any additional infrastructure to support your particular online initiatives? Thank you.
We are going to leave it to our labels to talk about what happens with their properties going forward. I know at times on these calls, people would like me to talk much more about upcoming releases, and sometimes there's some frustration that we don't. The truth is, though, we're trying to provide as much transparency as we can to our shareholders and leave the marketing decisions and the marketing announcements to our labels because that's where we maximize our sales. Once again, Rockstar will make appropriate announcements about their releases as they come, as will 2K. As they make those announcements, then of course, we'll reference them here. Let me emphasize that we feel very optimistic about our outlook going forward and very encouraged by the results we've had to date.
In terms of infrastructure, look, the world is going to resources that are outsourced and cloud computing, that's hardly a secret. We have zero interest in building up massive facilities and expending a great deal of money on CapEx. I don't expect that we'll see very significant CapEx investment. I think the bulk of our needs will be handled by third parties, whether that's our hardware partners or other third parties that help provide the capacity to have us meet consumers where they are. No, we're not building call centers, data centers, or server farms.
Okay, thanks, Strauss.
Thank you. Our next question comes from the line of Ben Schachter with Macquarie. Please proceed with your question.
First one for Lainie. Lainie, cash and accounts receivable are $1.2 billion. Accrued expenses are about $600 million, and I assume most of that are the internal royalties. What does that look like by the end of the fiscal year? Basically, just trying to get a sense of really what the net cash looks like. If you could talk about, are you going to be cash flow positive for 2015? Strauss or Karl, just in general, do you expect any meaningful changes in the overall business model with Microsoft and Sony this gen, or will the business model basically look like last gen? Thanks.
Ben, hi. For the cash flow for the remainder of this year, we see that we'll be cash flow neutral. We're not giving out guidance for 2015 yet, so we're not giving out cash flow expectation for that period either. The overall, the balance sheet, also, we don't give out projections on the balance sheet, but it should be in line with how the P&L flows for the next quarter.
Ben, it's Karl. First of all, we're thrilled with the launch of the next-gen consoles. We're very excited about how things are going right now, as I know Microsoft and Sony are. In terms of changes in business models between us, I don't anticipate anything meaningful at all.
If I could just follow up with one, maybe Strauss. Assuming that Google, Amazon, and Apple continue to press forward with their digital media initiatives, and it's very likely that they'll have their own boxes that get more content to television screens, how does that impact how you think about the business?
It's all good news because more distribution to consumers on a multiplicity of devices is a good thing, and we have reason to believe that it's going to be easier and easier to develop in a way that we can be readily available without too much porting expense across a multiplicity of platforms. If it costs money to port, and of course it does, then we have to make an economic decision based on who we think we're going to find at the other end, and that's a balancing act. We have invested heavily behind both Microsoft and Sony. It looks like, as Karl said, that's going to pay off and is beginning to pay off. We're thrilled about that. Our goal is to be where the consumer is and to be utterly ecumenical about other people's platforms as long as the economic model is reasonable.
I think the answer is we intend to be everywhere.
Great. Good luck.
Thank you. Our next question comes from the line of Drew Crum with Stifel Nicolaus. Please proceed with your question.
Okay, thanks. Good afternoon, everyone. I noticed that "Evolve" has not been announced for old-gen systems, and I think in your prepared remarks, you noted that "NBA 2K" and "WWE 2K" would be available on new-gen. Is that any indication as to your plans to support old-gen going forward? The second question pertains to "GTA V." There's been a lot of scuttlebutt or speculation that it'll be available on PC shortly. Not asking for a forecast on that, but can you give us some context, history with GTA prior titles on the PC? Thanks.
Hi, Drew. It's Karl. In terms of the old-gen versus new-gen question, I would say that any of our announcements that we've made to date don't necessarily reflect our plans, whether something's going to be specifically for next-gen or old-gen. It really is more a function of what platforms we've announced that they're going to be on at this point. We haven't said anything about "Evolve," but for next-gen platforms, we haven't said anything about our NBA titles, but for next-gen platforms or our sports titles, but for next-gen platforms. That doesn't necessarily mean that we're not going on current-gen or that we are going on current-gen. It's not related at this point. Just means we haven't had anything to share. In terms of "GTA V," I think you asked about PC?
Correct. Yes.
Yeah. At this point, there's really nothing for us to say about that. We haven't announced anything as it relates to any other platforms versus what's out there.
Okay, Karl, just trying to get a sense as to how it's performed on PC with prior iterations. Again, not asking for a release date.
You're talking about "GTA IV?
Correct.
Yeah. It's been a very strong PC title.
Okay. Thanks, guys.
Thank you. Our next question comes from the line of Neil Doshi with CRT Capital. Please proceed with your question.
Great. Thanks for taking my question. 56% of your revenue came from international this quarter. I think it's the highest we've seen in years. Can you provide any color as to what drove that strong international sales and how material was NBA 2K China? Then, on GTA Online, any thoughts on eventually making that a mobile opportunity just in order to keep people engaged in the franchise when they're away from their consoles or big screens? Thanks.
Yeah. The average selling price translated into U.S. dollars is higher outside of the U.S. than inside the U.S., so we certainly benefit from that. We also benefit from our strategy to make sure that our international distribution is very strong worldwide. Years ago, we made a big push into Asia through our headquarters in Singapore, and we're reaping the benefits of that. Obviously, with the sales of GTA V, we're seeing a benefit internationally. We also have seen a lot of growth in Latin America, and we're pleased with that. We continue to focus on building our international business, and these results are very gratifying. In terms of mobile opportunities, again, we don't really distinguish between mobile and fixed. We don't distinguish between tablet and PC. We don't distinguish between console and PC and tablet.
We do distinguish between screen size, small, medium, and large, because they accommodate different experiences. We have our own limitations based on a platform's technical ability to serve our needs and consumers' needs. Beyond that, we're utterly ecumenical, and with regard specifically to GTA, I'm sorry, we said it before, we're not talking about other releases yet, and we're going to leave it to Rockstar to have those discussions.
Thank you.
Thank you. Our next question comes from the line of Mike Hickey with Benchmark Company. Please proceed with your question.
Hey, guys. Thanks for taking my questions, congrats on another great quarter. Just curious on mobile strategies. It feels like there's a lot of value creation opportunity there for you. I know you've kind of experimented with premium, I think successfully, it feels like free to play is the answer here. You're definitely seeing some games achieve some tremendous success in the market, I think more to come. It also seems like you're a big bull there. Just thinking about your IP cache, the development talent that you have and maybe that you acquire, it seems like a no-brainer here to be more aggressive on the mobile side. Just hopefully you can share with us your strategic vision on how you see mobile and how impactful it can be for you in the future.
I don't want to confuse mobile with the free-to-play model because you could have, in China, you have a free-to-play model on PCs, obviously, which are largely wired. Certainly, free to play is a relatively common model for iPad and smartphone, but there's also a pay-to-play model on iPad and smartphone. I don't think mobile is the difference that makes a difference. I think the business model shifts depending on the geography, depending on the title, depending on what a consumer wants. We sold "GTA V" as a package good. We sold it as a digitally downloadable title. We made "GTA Online" available free to play, and there's an option to spend money inside the game. For "NBA 2K" China Online, it's free to play, and there's an option to spend money within the game.
Our business model reflects the title, the geography, and what consumers want. Whether it's mobile or wired is of no consequence.
Mobile appears to be a hyper-growth market, is it something that you plan to put more resources towards? I think part of the problem with your valuation is that, in a lot of people's minds, you're still stuck to the console. I think for the most part, the majority of performance is console driven, you look at the trends that are shaping our future, mobile's a big part of them. Do you expect to put more resources there? Is this something that you look for in M&A? Any other thoughts would be appreciated.
Again, I think I view mobile differently than you do, Mike, because the content isn't mobile. The content can be anywhere. The question is, how heavy is it? What kind of processing power is required for the graphics and the gameplay? Right now we don't have the ability to take a game that we put on what is now current-gen consoles and put it onto an iPad, because an iPad doesn't have the processing power to allow that. I'm a believer that it will. When it does, I have every reason to believe that we'll support that with current releases, because that's the history of what we've done. Right now, we're putting out some of our older titles on iPad and other tablets because they support the titles, and we're able to delight consumers and make money as we do it.
I'm a big bull on where mobile platforms are going, and I think they're great entertainment platforms. If they can support what we do creatively, then we'll be there, and if they can't, then we have to wait until they can. If you're asking, can we create experiences specifically for mobile? We've done that as well, with limited success, frankly. If what you're saying is you think that we ought to be more attuned to companies that create lighter experiences specifically for what current mobile platforms can do, for example, Zynga just bought a company, NaturalMotion, that does that. They do what some people call mid-core experiences. I have no quarrel with NaturalMotion or with the strategy. I think the answer is, from our point of view, is there an opportunity that makes sense to do that, and does it fit with our DNA?
I know so far, the bespoke stuff that we've done for these lighter platforms has enjoyed limited success.
Okay. Fair enough. Thanks. Last question, if I can. There's kind of a perception, at least my perception, that as you have these next-gen early adopters, and obviously it's been a big success here initially out of the gate, that maybe they're leaving the online play experience from GTA as they upgrade the console experience. Maybe the impact is not as significant right now because there's really a lack of quality content. Are you seeing, and I know you're hesitant to share engagement, but is that reasonable to expect that as people upgrade, that they're not playing on prior-gen machines?
Look, we were selling PS2 products until very recently. If you have great quality titles, it's remarkable how long people will continue to consume them. I know some of our competitors have expressed that they've seen a big falloff in what is now old-gen catalog, but we've made it plain that we haven't seen such a falloff, and that's reflected in our very strong third quarter results, where our catalog performed as well. I think you're right. As these new platforms gain momentum, we hope they will, software is made available for them, a lot of consumers will turn their attention to that, and that's why we have more than 10 titles in development for these new platforms and why we're so very enthusiastic and optimistic about our future.
We remain very enthusiastic about our catalog, which continues to sell more units per SKU than anyone else's catalog over time. Why is that? Because we have the highest quality in the business, according to Metacritic, for the past five years. We don't rest on our laurels. We know that's the past five years. We got to do it every day, and we take that mission very seriously indeed.
Thanks, guys. Best of luck.
Thank you. Our next question comes from the line of Edward Williams with BMO Capital Markets. Please proceed with your question.
Good afternoon. Just a couple of, first of all, some quick questions. Lainie, can you just clarify that the rise that we saw in accrued expenses, is that related to internal royalties or something else that's driving that increase?
I can't confirm the exact details of the account, it was to do with certain items for compensation for our incentive compensation plan, as well as other items that would have been driven from the top line of the quarter.
Okay. How much of your cash is onshore?
60% is in the U.S., 40% is international.
Okay. The last one of these questions is, looking at headcount at quarter end, where was that number?
We had a total of 2,500 employees at the end of the quarter, and approximately 1,800 were development employees.
Okay. Strauss, just to look at your perspective that you should be maintaining profitability in fiscal year 2015 and beyond, can you comment a little bit about what's driving that view? Is it your knowledge about cost control in that time period? Is it your visibility around revenue? What's driving that comfort level at this point?
Well, as you'd imagine, it's our pipeline of development, our anticipated release schedule, the costs related to development, the costs related to marketing, and the expectations of performance within a range. Of course, there's a degree of additional cushion provided by our views as to our catalog and recurrent consumer spending related to releases that are already in the marketplace.
Okay. Your thoughts about the transition that we're seeing right now. Obviously, you commented that you're pretty enthusiastic about the adoption rate of the new consoles, but what's your perspective about the health of the retailers and the retailer inventory levels?
We haven't had any issues with our retailers at all. They remain our most important channel partner. There were some issues in the U.K. some time ago, but it's been a relatively robust and quiet marketplace.
Okay, great. Thank you very much.
Thank you. Our next question comes from the line of Brian Fitzgerald with Jefferies. Please proceed with your question.
Thanks, guys. Following the same line of questioning on the next-gen consoles, can you give us a sense of the % of users that are downloading full games versus buying at retail? Then current gen versus next gen, are you seeing any behavioral differences in terms of engagement or tie ratios or willingness to download DLC, et cetera?
Brian, it's too early for us to have a view on that, because remember, there's a relatively small population of what is now this new generation of consoles out there, and we wouldn't seek to make those comparisons yet. In any case, we don't run our business based on that data. It doesn't tell us anything. We could know its tie ratio, but it doesn't change our behavior.
Okay. Really quickly, it's going to be early too. Any early impact or signals you're seeing from demand in China from the console standpoint?
Way too early to say. No console's launched there.
Okay.
Thank you. Our next question comes from the line of Doug Creutz with Cowen and Company. Please proceed with your question.
Hey, thank you. It's a pretty quick one. You mentioned you have a lot of story-based Grand Theft Auto V content in development. Can you just say whether your March quarter guidance contemplates any of that being released in the March quarter? Thank you.
Yeah, we haven't given any color on that.
Okay, thank you.
Thank you. Our next question is from the line of Larry Haverty with Gamco Investors. Please proceed with your question.
Yes. Hi, Strauss. It seems to me the market, looking at the way the stock's acting, the market's penalizing you for these converts, and they're kind of extraordinary instruments. Could you walk through when they are able to be converted and the conversion price at this point? I have a follow-up on that.
The first convert that we have in the market, the $250 million one, matures on December 2016. The second one, $287 million, matures in July of 2018.
What are the coupons on those right now?
Well, the strike price on the first one is $19.09. The strike on the second one is $21.52.
You have the ability right now, if you were to, I'm not sure where these things are trading, take away almost 30% of the common shares for basically half of the cash. That would seem to me to be an extraordinarily good trade, because the way the accounting is, it's very hard for someone to economically figure out whether the share count is 84 or 125 million. It's a huge gap between actual shares outstanding in the quarter and the potential dilution using the if-converted method. I think it's wreaking havoc on the way investors are valuing your stock, and the idea that these converts have an economic purpose given the cash position and efficient capital allocation, I think is a bit presumptuous. Could you discuss these issues?
There are obviously limitations in our ability to redeem before a certain period of time that's built into the indenture, as you know, Larry. We do back out the number of shares, I think Lainie quoted them, 26 million of shares tied to it. You can easily back that out of the weighted average shares.
Right. You also, sorry, the coupon on them is 1.75% on the first one and 1% on the second one.
They were highly efficient capital instruments when we launched them, and I greatly respect your view of the market and how the market sees the converts. I think they still represent a very positive source of capital to the company. In any case, they're rather low coupon instruments with rather a high, in the case of the second one, strike prices compared to the current market price in the case of the second one. Of course, when we launched the first convert, it was significantly higher than the stock price at the time. In any case, there are limitations on how we go about redeeming them that we must observe.
Buy them in the open market, though, right?
I suppose we have the ability to. That's a way that we could return cash to shareholders.
Okay, great. Thanks.
Thank you. I would now like to turn the conference back over to Strauss Zelnick for any closing comments.
I just want to thank you all for joining us today. We're exceedingly pleased with our results and immensely grateful to our shareholders and, of course, are primarily grateful to all of our colleagues all over the world who once again have hit it out of the park. Thank you very much.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.