Greetings, ladies and gentlemen, and welcome to the Take 2 Third Quarter Fiscal 20 14 Earnings Conference presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Hank Diamonds, Senior Vice President of Investor Relations And Corporate Communications for Take 2. Thank you, sir.
You may begin.
Good afternoon. Welcome and thank you for joining Take 2's conference call to discuss its results for the third quarter of fiscal year 2014 ended December 31, 2013. Today's call will be led by Thraut Zelnick, Take 2's Chairman and Chief Executive Officer Carl Sladoff, our President and Lainie Goldstein, our Chief Financial Officer, sir. We will be available to answer your questions during the Q And A session following our prepared remarks. Before we begin, I'd like to remind everyone that the State made during this call that are not historical facts are considered forward looking statements under federal securities laws.
These forward looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us. We have no obligation to update these forward looking statements. Actual operating results may vary significantly from these forward looking statements based on a variety of factors. These important factors are described in our filings with the SEC, including the company's annual report on Form 10 K for the fiscal year ended March 31, 2013, and Form 10 Q for the fiscal quarter ended September 30, 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.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 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 Five, 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 consumer's appetite for the highest quality entertainment.
Grand Theft Auto5 continues to expand its audience around the world demonstrating how Rockstar Games have taken their series in our industry new heights for innovation and excellence. Upon release, the title shattered entertainment records selling through $800,000,000 in 24 hours and over a $1,000,000,000 in only 3 days. And it was the best selling video game of 2013 according to the MPD group. To date, Grand Theft Auto5 is sold in more than 32,500,000 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 Five is only part of Rockstar Games on parallel track record.
To date, the label is sold in nearly 2 3,000,000 games worldwide across multiple hit series. 2K built upon their legacy of delivering highest rated and top selling basketball video game with their current next gen releases of NBA 2K14. The titles become the fastest selling release in III of our NBA 2K franchise, with sell in today to more than 5 million units across console and PC. I'd like to congratulate the team at Visual Concepts who simultaneously created 2 outstanding products for current and next gen platforms. Quickly proven to be a successful addition and the title is being supported with add on content, including the season pass, featuring many of fan favorite WWE superstars and legends.
We believe there's a meaningful opportunity Revenue from digitally delivered content grew 42 percent year over year to $132,800,000, nearly half of 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 who've 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 and 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 incident, Borderlands 2, Sid Meier's Civilization 5, and WWE 2K14. Forter Lens II is a prime example of how we're able to generate substantial revenue and profits from add on dollars over an extended period. In the 16 months following the title launch, we released 9 substantial downloadable offerings, dozens of smaller care customizations, and we plan to release more downloadable content in the coming months. This is in addition to packaged goods, 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 titles becoming the highest selling release in the history of 2K.
Where the more than 8,500,000 units sold in 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 of 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 to our audience and generate incremental revenue and profits with modest development costs and virtually no marketing spend. 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 past year speaks to our focus on consistently delivering hits. I'm particularly proud that Take 2 was the top video game publisher of 2013 according to the MPD group.
This is a tremendous achievement, and I'd like to congratulate Rockstar Games, 2k, and our entire Take 2 team for making this happen. Turning to our balance sheet. We ended the 3rd quarter with cash of almost $1,000,000,000. We're committed to driving long term shareholder value, including by returning capital to our investors. To that end, we repurchased $277,000,000 or 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. Projected non GAAP net revenue of nearly $2,400,000,000 and earnings of more than $4 per share Looking ahead, we have a robust pipeline for both new intellectual properties and offerings from our proven franchises and development, including more than 10 unique titles for the next generation consoles. We believe that the initial success of Xbox 1 and PlayStation 4 bodes well for an 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 and emerging platforms and business models that complement our core focus. With a proven strategy, world class creative team the strongest portfolio of owned intellectual property in our industry, cutting edge technology and 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 Carl.
Thanks Russ. Today, I'll provide an update on our development pipeline. Through Grand Theft Auto V, Rockstar Games has redefined the term blockbuster, not just for gaming, but also for the entire entertainment industry And since its launch in October, millions of consumers have engrossed themselves in Grand Theft Auto Online, which has quickly become a living, living 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 2,000,000 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, Lostau Games plans to release substantial story driven downloadable add on content for Grand Theft Auto5. 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 5 or XCOM enemy unknown from Pirax's games, 2 k will launch complete additions for each title for the PC. Featuring the full game, plus all previous released add on content, These additions 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. Cheekay recently entered into a partnership Pepesda to create 2 bundles featuring each publishers renowned titles in a single package. On February 11th, 2 cable release the Borderlands 2 and dishonored bundle and the Elder Scrolls 5 SKYRAM and BioShock infinite bundle. Each available for the XPOP 360, PS3, and PC. Also coming up, 2K will support buyer infinite with the release of BioShock infinite burial at C 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 Solar Rock Studios creators of the cooperative shooter classic, left for dead, unveiled Evolve, an exciting new intellectual property that is poised to be a generation defined multiplayer experience. Evolve, which will be available this fall for Xbox multiplayer experiences as a team of 4 hunters based 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 with the 4 hunters or in the third person when playing as a monster, providing a unique gameplay experience. Tuka has kicked off the preorder campaign for Evolve featuring the Monster expansion pack, which includes the Savage Goliath Skinnett Launch and a new Monster 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 our NBA 2K and WWE franchises, as well as other unannounced titles that promise to raise the bar for excellent We'll have more to share about our titles in development throughout the next several months as we head into E3. And 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 Wayne. Thanks, Carl, 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 in all comparisons or year over year, unless otherwise stated. Our press release provides a reconciliation of our GAAP to non GAAP regimens. Starting with our results for the fiscal third quarter, net revenue increased 90% to $767,700,000. This exceeded our outlook range of $650,000,000 to $700,000,000 due primarily to the continued success of Grand Theft Auto5, 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 $132,800,000 of net revenue. Bioshock incidents. Catalog sales accounted for $113,000,000 of net revenue led by Borderlands 2, the Grand Theft Auto franchise, Xcom, enemy unknown, BioShock, Internet, and Civilization V. Gross margin decreased 3.4% points to 44.7 percent due primarily to higher internal royalties. Operating expenses for approximately $27,000,000, up by about $60,000,000 due primarily to higher marketing expenses to support our 3rd quarter releases continued marketing spend for Grand Theft Auto5 and higher personnel expenses due to our increased headcount.
Interest and other expense was $700,000. And non GAAP net income was $210,700,000 or $1.70 per dollars per share in fiscal third quarter 2013. This exceeded our outlook range of $1.20 to $1.35 per share, due primarily to our better than expected results from operations. On a GAAP basis, we reported revenue of 1.86 $1,000,000,000 and net income from continuing operations of $578,400,000 or $4.69 per share. Turning to some key items from our balance sheet at December 31, 2013, as compared to September 30, 2013.
Our cash balance increased to $972,200,000. Our accounts receivable balance decreased to $189,500,000, primarily with reflecting collection of receivable associated with the launch of Grand Theft Auto5 near the end of the second quarter. Inventories decreased to 45,000,000 dollars, primarily due to the launch of NBA TK14 in early October and shipments for replenishment orders of grant that's out of 5. And software development costs and licenses decreased to $193,800,000, reflecting the amortization of development costs for our fiscal 2014 release Now, we'll review our financial outlook for the full year 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 3rd quarter results and low share count due to our repurchase of 16,240,000 shares in November.
We now expect non GAAP net revenue to range from of $2,350,000,000 to $2,380,000,000 and non GAAP net income to range from $4.15 per share to $4.25 share. These would be record results from our labels to be roughly 70% from Moxo Gains and 30% from 2K. We expect our geographic revenue split to be about 50% 96 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 $11,000,000, tax expense of about $14,000,000 and weighted average fully diluted shares of approximately 121,000,000 This reflects weighted average basic shares of approximately 84,000,000, 11,000,000 participating shares for unvested stock based compensation awards and 26,000,000 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 $170,000,000 to $200,000,000 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 stands up at a Santas Auto5, Grand Theft Auto Online, Borderlands 2, and WWE 2K14. We expect 4th quarter gross margins in the low 50s.
Total operating expenses are expected to decrease by approximately 16% from the prior year's 4th quarter, driven primarily by lower selling and marketing expense. Selling and marketing expense is expected to be about 15% of net revenue based in the midpoint of our outlook range. Our 4th quarter outlook also reflects interest and other expense of approximately $2,000,000, tax expense of about $1,000,000 and weighted average fully diluted shares of approximately weighted average basic shares of approximately 77,000,000, 12,000,000 participating shares for our unvested stock based compensation awards, and 26,000,000 shares, representing the potential dilution from our convertible note under the if converted method of accounting. Today takes us down to the strong Financial Foundation and the history of our company. This is achieved through our ability to balance Leading Edge Creative Endevers with a disciplined approach to capital investment.
We are confident that our continued focus will enable Take 2 to deliver profits and returns for our shareholders over the long term. Of course, none of this would be possible without the hard work of our entire team, but I'd like to thank for their dedication to the company. Thank you. Now I'll turn the call back to Jeff.
Thanks, Carl Rainey. 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.
Thank you. You. Our first question comes from the line
Thank you. Can you talk a little bit about, kind of remind us of what you said about the GTA online usage? I think you said 70% of the people who are online connect played online. Repeat that. And then then what are people doing in there and and and paying for so far and and what's your outlook going forward?
Justin, it's Carl. We we've got 7 we what we said is there 70% of the folks who are playing have played the game with an internet connection have played TTA online. Okay. Okay.
And and and those that are paying,
what what are they what are they paying for? Currently? And how do you see the opportunity going forward?
Well, 1st of all, we're very optimistic about the opportunity. Things are going very well, and we're very happy with the how things are going in GTA online. Lots of great content out there already and a lot of great content on its way. So we are 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, but otherwise, there are a lot of different ways that you can enjoy the content online.
There are predetermined death matches, the make your standard death match your races. In terms of buying, we have a GTA cashback. So in order to experience some of the game, you can buy cash tax and then it allows you to unlock certain content, items that you can buy, etcetera. So it's a standard online transaction model that you would days.
Okay, great. And then 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 non mobile. Our view is that a platform that a consumer wants to use to experience the best in interactive entertainment is good for us. And the only question is what are the processing limitations or graphic limitations, which is why we 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're currently listed. If you believe in Moore's Law and I do, then you believe the tablets will be tantamount to PCs pretty soon. And I have a 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 and congrats on another great quarter. So just to circle back to the last a 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?
And can you just take us through the timing of that? When that went sort of back on line with that towards the end of the quarter? And is there maybe some catch up to happen here in the March quarter?
Yes. I mean, I've made a plane that we have been, learning as we go along in this area. And, our primary goal 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. But, we've sold in 32,500,000 units of grant theft.05, we've enjoyed an extraordinary economic result.
But the starting point for that economic old. It's delighting consumers, giving them a fantastic experience. And that's our focus in GTA online. And 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. And, we're not really focused on whether there's catch up or anything of this sort, as long as people keep loving GTA online, it's going to be great for us.
Great. And 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, you know, the number of people that were online, you know, how long can can this go?
You know, James, I'm so thrilled to be to be asked to answer how high is up question because it's sort of novel for us around here. Look, we're thrilled. We're just thrilled. And we know we certainly are following metrics very carefully and we're growing our expertise every day. But we made a plane 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. But, the the watchword 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, very optimistic about GTA Online.
And I think there's, there's plenty more opportunity and we've made no bones about the fact that we have expectations for GT online in the fourth quarter. For example. So clearly, we have expectations going forward, but we're not at a point yet where we want to share
the metrics. Very helpful. And I guess just last question, Strauss.
I mean, the performance of
your company over the past 6 months, certainly since GTA has come out, it's been through the roof. Hopefully tomorrow will be a different story, but your stock has been essentially sideways over that time. I guess you'd be surprised that your stock hasn't done more. Seems like you've gotten out a lot more and talk to investors. What would they like to see to reward your shares more commensurately with your performance?
And I guess, are there two ways to skin this cat? I mean, 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.
We never met a CEO who didn't think his or her stock was undervalued. And 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 And I'm really proud of it in the last 7 years. Every year, we've launched a new multimillion 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, and moreover that they love following their passions. And that the collection of that strategy and that execution, as Laney said, has yielded an extraordinary financial result. And we sit here today Once again, beating our guidance for the 6th quarter in a row, once again increasing our outlook now to $4.15 to $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. 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? I mean, look, the the sometimes the market takes a long time to come to review of of where we are and where we're going. And, once I asked one of our very sophisticated investors why the stock had gone down and he said to me, more sellers than buyers.
So 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, really hard. I'm convinced that there will be a narrowing gap between our reality and have a sees us.
Our next question comes from the line of Eric Handler with MKM Park Please proceed with your question.
Yes. Thanks for taking my question. Just a couple of questions for you. With regards to GT Online, you said 70% who have played with internet connection have played GTA online. Just curious, what percentage of that 70% are you have actually been monetized with some type of micro transaction?
And 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 to debt, you've got over $500,000,000 of cash. Is there a certain amount of cash that you want on hand at all time for operational purposes And when it looks like you really didn't buy back any more stock after the, announcement that you made in late number about repurchasing the Ikon shares and then 4,400,000 shares in the open market. Have you bought any since that time?
Yes. We're not talking about the percent that have monetized. We're not disclosing those metrics in And that's primarily because it's still a work in progress. In terms of the balance sheet, there absolutely is a base amount cash on hand in the several $100,000,000 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 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. And of course, when we do have a frontline release of Grand Theft Auto, we've been very fortunate for those results as well. So it's been a lot of good news around here. But not everything always goes our way. We have had disappointing releases.
And We are a pure play entertainment company and there's an element of volatility baked into that. And the ability to play another day, the ability to bet on your releases, the ability to spend a good deal of money and development and marketing is highly correlated with success and entertainment, which is why across all content businesses. And I've been involved with all of them over the course of my career, the rich get richer, if they can keep delivering. Now we're 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 explained 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. And then the second thing they do point out the things that didn't go to as well they wanted in the areas that we need to improve in.
And it's that culture that I think protects us, but even so now and then we get 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, and 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 or not, as though they'll be redeemed in equity.
And we have purchased $277,000,000 of stock. I know we have no new announcements on that since those purchases. And we've made no bones about the fact that we'd be very interested in highly accretive M and A. And let me emphasize highly accretive. And by that, I do not mean speculatively so, I mean, actually so.
So there we'll continue to grow organically in a disciplined way. We are we given that we are in a high risk business, we are very focused on risk mitigation. We are focused on a measured way looking for strategic opportunities to grow inorganically. And we absolutely have our eyes wide open about returning more capital to the shareholders.
Okay. And then 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 from a franchise above and beyond the 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, Chris.
Thank you. Our next question comes from the line of Mike 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, but can you maybe give us an idea if this is, really gonna be of the one big nonrecurring title that you plan to launch in 2014?
I'm sorry. What do you mean by nonrecurring title?
As in like NBA 2K as an annual title?
Oh, I see. Yes. Well, we we like I said before, we've announced that we've got unannounced titles and development at this point. Haven't given any other disclosure, but 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.
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. 2 questions, if I might. One, if you look across 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 of Borderlands and didn't have a successful Red Dead.
Can you kind of give us scale of how that distribution changed cycle to cycle and where it might go in the new one. And then Secondly, Strauss relative to your comments on making accretive M and A. If you look over the last 4 or 5 years, there's been a lot of M and A in video game land. And I think most would agree that not a lot of it has been accretive at least not for very long. As you look at opportunities and given you're experiencing broader media, would that deal have to be in video games itself or might you look to broaden the scope of what Take 2 does in terms of the the mediums it serves?
Yes, we don't have the numbers in front of us in sort of comparing this launch and our other titles to the last launch to Tier 4 and other titles. It would be very hard to do that apples to apples because obviously it's not as though we have all those schedules of all the titles in lockstep. We do have a lot more big franchises today than we had when we launched GTA form. 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. So I think you can safely assume that the percentage is lower now, than it was before.
But beyond that, I don't think we can give much color In terms of M And A, look, you're 100% right. The track record of, of, the industry is not wonderful, although Activision has done some very clever transactions. I would argue when the stock price reflects that. But across the board, it hasn't been a pretty story. And we just don't believe in pie in the sky.
We barely believe pie right in front of us unless we're eating it. So, I think the answer is strategy really matters execution. They matter more than strategy. And, would we contemplate other forms of digital entertainment in addition to pure video game entertainment, we would contemplate that. But beyond that, we don't have much else to say now and certainly nothing to Thank you.
Thank you. Our next question comes from the line of Colin Sebastian with Robert W. Baird and Company. Please with your question.
Thank you and congratulations on the quarter. First off, if you could provide any perspective on the efforts required bring a franchise like GTA5 over its other platforms. If that's more or less a traditional port or does rock or have someone higher standards that require something more in-depth in terms of extensions. And then on the digital strategy, I know the content and you have to decide how much infrastructure and servers and networking to build yourselves versus relying on others your case like Sony and Microsoft. So my question is looking ahead based on your experiences to date.
Do your platform partner 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 towards your particular online initiatives? Thank you. We're going to leave it to our labels to talk about what what happens with their properties going forward. We think that's I know at times, on these calls, people would like me to talk much more about upcoming release 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 lead the marketing decisions and the marketing announcements to our labels because that's where we maximize our sales. So once again, Rockstar will make appropriate announcements about the releases as they come as well to K. And as they make those announcements, and of course, we'll reference them here. But when we 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, and that's hardly a secret.
And 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, to, have us meet consumers where they are. But no, for example, we're not building call center data centers or server fronts. Okay.
Thanks, Jeff.
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 were about 1,200,000,000 crude expenses are about $600,000,000. 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 look like?
And then if you could talk about are you going to be cash flow positive for 'fifteen? And then, Strauss or Carl, just in general, do you expect any meaningful change in the overall business model with Microsoft and Sony this general over the business model in case it look like that last gen. Thanks. Ben, hi. For for the cash flow for the remainder of year, we see that we'll be cash flow neutral.
We're not giving out guidance for 15 yet, so we're not giving out cash flow expectation for that period either. And 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 and L flows for the next And then, Ben, it's Carl. First of all, we're thrilled with the launch of the NextGen 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.
Assuming that Google, Amazon, and Apple continue to press forward with their digital media initiatives, and very likely that they'll have their own box get more content to television streams, how does that impact how you think about the business?
It's all good news because more distribution to consumers on multiple CD devices is a good thing. And we have reason to believe that it's going to be easier and easier to develop a way that we can be readily available without too much porting expense across the 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. That's a balancing act. We have invested heavily behind both Microsoft and Sony.
It looks like as Carl said, that's going to pay off and is beginning to pay off. We're thrilled about that. But our goal is to be where the consumer isn't to be utterly ecumenical about other people's platforms as long as the economic model is weak. So I think the answer is We intend to be
of Drew Crum with Stifel Nicolaus. Please proceed with your question.
Okay. Thanks. Good afternoon, everyone. So I noticed that Evolve has not been announced for OldGen systems, and I think your prepared remarks, you noted the NDA 2K and WWE 2K would be available on NewGen. Is that any indication is your plans to support OldGen going forward?
And then the second question pertains to GTA5. There's been a lot of scuttlebutt or speculation that will 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. Thank you, it's Carl. In terms of, excuse me, in terms of the Ogen versus new gen, question, I would say that any of our announcements, the made today don't necessarily reflect our plans whether something is going to be specifically for next gen or old gen. It really is more a function of what we've announced what platforms we've announced that they're going to be on at this point. So we haven't really, we haven't said anything about Evolve, but next gen platforms.
We haven't said anything about our, our NBA titles, but for next gen platforms, our sports titles, but for next gen platforms, But 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. It just means we haven't had anything to share. In terms of GTA5, either, I think you asked about PC? Correct.
Yes. Yeah. At this point, we there's really nothing for us to say that. We haven't announced anything as it relates to any other platforms versus what's out there.
Okay, Carl. Just trying to get a sense as to how it performed on PC with prior iterations. Again, not asking for a release.
You're talking about you're talking about GTA4?
Correct.
Yes, it's been a very strong PC title.
Our next question comes 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 what drove that strong international sales and how material was NDA 2K China.
And then, on GPA Online, any thoughts on I'm eventually making that a mobile opportunity just to in order to keep people engaged in the franchise and they're away from their console victories? Thanks.
Yeah. You know, 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. And obviously, with the sales of GTA5, where we're seeing a benefit internationally. We also have seen a lot of growth in Latin America and we're pleased with that. So we can 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. And we have our own limitations based on our platform's technical ability to serve our needs and consumers' needs. But beyond that, we're utterly ecumenical. And, with regards specifically the GTA, I'm sorry, we've said it before, we're not talking about other relief 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 and congrats another great quarter. Yes, just curious on mobile trials. I mean, it feels like there's a lot of value creation opportunity there for you. I know you've kind of experimented premium, I think successfully, but it feels like how free to play is the answer here and you're definitely seeing some games achieve some tremendous best in the market and I think more to come. It also seems like you're a big bull there.
So just thinking about kind of your IP cash development talent that you have and maybe that you require, it seems like a no brainer here to be more aggressive on the mobile side. So I was just hoping you could kind of share with us your strategic vision on how C Mobile and how impactful it can be for you in the future?
Well, I don't want to confuse mobile with free to play model because you could have, in China, you have a free to play model on PCs, obviously, are largely wired, you certainly, free to play as a relatively common model for Ipad and smartphone, but there's also a pay to play model on Ipad and smartphone. So 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. So we sold GTA5, for as a package period, we sold it as a digitally downloadable title. We've made GTA online available free to play, and there's 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. So our business model reflects the title, the geography of what consumers want, whether it's mobile or wired is of no consequence.
I mean, mobile appears to be a hyper growth market? And is it something that you plan to put more resources towards? I mean, I think part of the problem with the evaluation is that in a lot of people's minds are still stuck to the console. And I think for the most part, the majority of performance is console driven, but you look at the trends that are shaping our future mobile is a big part of them. So do you expect to put more resources there?
I mean, something that you look for M and A, the thoughts would be appreciated.
Again, I don't 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? How what kind of processing power is required for the graphics and the gameplay? And right now, we don't have the ability to take a game that we put on current what is now current gen consoles and put it onto an iPad.
Because not that doesn't have the processing power to allow that. But I'm a believer they will. And, when it does, I have every reason to believe that we'll support that with current releases because that's history of what we've done. Right now, you know, we're putting up some of our older titles on Ipad and other form 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, and we have to wait until they can. If you're asking, can we create experiences specifically for mobile, You know, we've done that as well, with limited success, frankly.
So if what you're saying is you think that, we ought to be more attuned to companies that create lighter experience specifically for what current mobile platforms can do. For example, Zengage has bought a company, Natural Motion that does that. They do what some people call them mid core experiences. Then I have no coral with natural emotion or with the strategy. But 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?
And I know so far the bespoke stuff that we've done for these lighter platforms have had has enjoyed limited success.
Okay. Fair enough. Thanks. Last question, if I can. The, this kind of perception, at least my perception, that is you have these next gen early adopters.
And obviously, it's been a big success here initially out of the gate. That and maybe they're leaving the online play experience in GTA. As they upgrade the console experience. And maybe the impact is not as significant right now because there's really a lack of quality content But are you seeing and I know you're hesitant to share engagement, but I mean, is that reasonable to expect that as people operate that they're not playing on on prior gen machines?
Look, we were selling PS2 products until very recently. If you have great quality titles, remarkable how long people will continue to consume them. I know some of our competitors have expressed that they've seen a big fall off in what is now old gen catalog. But we've made a claim that we haven't seen such a follow-up and that's reflected in our very strong third quarter results, where our catalog performed as well. So I think you're right, you know, as as as these new platforms gain momentum, we hope they will.
Software's 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. Equally, we remain very enthusiastic about our catalog, which continues to sell more units per SKU than anyone else's catalog time. Why is that? Because we have the highest quality in the business according to Metacritic for the past 5 years.
And, we don't rest on our laurels. We know that's the past 5 years. 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.
A couple of, first of all, some quick questions. Lanny, can you just clarify that the rise that we saw in accrued expenses, is that related to internal royalty or something else that's driving that increase.
I can't confirm, you know, the exact details of the account, but it it was to do with, certain items for compensation, for, our incentive compensation plans, as well as other items that would have been given from the top line of the quarter. 60% is in the U S and 40% is international.
Okay. And then the last one of these questions is looking at HEIC at quarter end. Where was that number?
We had a total of 2500 employees at the end of the quarter and 18 100 approximately 1800 more development employees.
Okay. And then, Strauss, just to look, at your kind of 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 that your your kind of knowledge about cost control in that time period? Is it your visibility around revenue?
Kind of what's driving that comfort level at this point?
Well, as you'd imagine, it's our pipeline and development, our anticipated release schedule, the cost related to development, the cost related to marketing and the expectations of performance within a range. And 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. And then your thoughts about the kind of the transition that we're seeing right now. Obviously, you commented that you're putting gastic about the adoption rate of the new consoles. But what's your perspective about the health of the retailers and kind of the retailer inventory levels?
We haven't had any issues with our retailers at all. They remain our most important channel partner. And there were some issues in the UK some time ago, but it's been a relatively robust and quiet marketplace.
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 NextGen consoles, can you give us a sense of the percentage of users that are downloading full games is buying at retail? And then current gen versus next gen, are you seeing any behavioral differences in terms of engagement or tie ratios or willing to download VLC, etcetera? It's 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. But in any case, we don't run our business based on that data. We, you know, it doesn't tell us anything. We could know it's high ratio, but it doesn't change our behavior. Okay.
And then really quickly, it's going to be early too, but any early impact or signals you're seeing from demand in China from the console standpoint? Way too early to say. I mean, console launch there.
Our next question
comes from the line of Doug Creutz with Cowen and Company. Please proceed with your question.
Hey, thank you. So it's a pretty quick one. You mentioned you have a lot of story based GTA5 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 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 stocks act 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, and then I have a follow-up
on that. The first convert that we have in the market is the $250,000,000 1 matures on December 20 16 and the second 1, 280,287,000,000, matures in July of 2018.
And what's what's what are the coupons on those right now?
Well, the the strike price on the first one is 1909 and the strike on the second one 2152.
So you have the ability right now if you were to I'm not sure where these things are are trading. Take away almost 30% of the the common shares for, uh-uh, basically, half of the cash. And that would 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 $84,000,000 or $125,000,000. It's a huge gap between actual shares outstanding in the quarter and the potential dilution using the if converted method. And, I think it's wreaking havoc on the way investors are valuing your stock and the idea that these converts have an economic process, given the cash position.
And an efficient capital allocation, I think, is a bit presumptuous. Could you discuss these issues?
We have there are obviously limitations in our ability to redeem before a certain period of time that's built into the adventure, as you know, Larry. We do back out the number of shares, I think, Lainie quoted in $26,000,000 of shares tied to it. So you can easily back that out the weighted average shares. And,
And you also you had, 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 in 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. But in any case, they're rather low coupon, instruments would rather, high in the case of the second one's drug prices compared to the current market price in case of the second one. And of course, when we launched the first converter, significantly higher than the stock price at the time. But in any case, there are limitations on how we go about redeeming them, that we must observe.
Them in the open market though, right?
Suppose we have the ability to. That's one other, that's the way that we could return cash to shareholders.
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, 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.