Good evening, welcome to the Take-Two second quarter fiscal year 2014 earnings 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, Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications of Take-Two Interactive. Thank you, sir. You may begin.
Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the second quarter of fiscal year 2014 ended September 30th, 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 June 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.take2games.com. Now I'll turn the call over to Strauss.
Thanks, Hank. Good afternoon, thanks for joining us today. I'm pleased to report that Take-Two delivered record non-GAAP revenue and earnings during the fiscal second quarter, driven by the unprecedented worldwide success of Grand Theft Auto V. Consumers and critics alike responded passionately to the title, enabling it to become the fastest-selling entertainment release in history, with retail sell-through of more than $800 million in its first day and over $1 billion in only three days. Hailed by The New York Times as, quote, "the most immersive spectacle in interactive entertainment," Grand Theft Auto V received extraordinary reviews, including over 160 perfect scores. The title has already sold in nearly 29 million units worldwide, exceeding the lifetime sell-in of Grand Theft Auto IV on console in less than six weeks after launch.
Demand remains strong as consumers immerse themselves into the vast world of Grand Theft Auto Online. We're immensely proud of and grateful to the team at Rockstar Games, who consistently redefine what can be achieved in interactive entertainment. I'd like to congratulate them all on delivering an unparalleled experience and superbly marketing Grand Theft Auto V in a way befitting a cultural phenomenon. I'd also like to thank our sales team for their critical role in making this launch one for the record books. In addition to Grand Theft Auto V, our second quarter results benefited from robust demand for our digitally delivered offerings and renowned catalog titles. Revenue from digitally delivered content grew 85% year-over-year, driven primarily by full game downloads and add-on content, along with smaller contributions from virtual goods and mobile offerings.
During the second quarter, 2K released Firaxis Games' massive PC expansion pack, Sid Meier's Civilization V: Brave New World, as well as the first add-on content for Irrational Games' BioShock Infinite and additional add-on content for Borderlands 2. It bears noting that the phenomenal success of Grand Theft Auto V, along with the strong performance of our other recent AAA releases, continues to demonstrate consumers' enduring appetite for groundbreaking interactive entertainment. During a challenging period for many in our industry, our past four most significant current generation releases, Borderlands 2, NBA 2K13, BioShock Infinite, and Grand Theft Auto V, each sold in more units than any prior title from their respective franchises within the same period after release. We believe it's our unwavering commitment to quality, one of Take-Two's core philosophies, that has been and will continue to be our distinguishing pathway for success.
As a result of our significantly better than expected second quarter results and our positive business outlook for the remainder of the year, we're increasing our financial outlook. Fiscal 2014 is poised to be a record year for our company, with projected non-GAAP net revenue of $2.2 billion-$2.3 billion and non-GAAP net income of $3.50 per share-$3.75 per share. Looking ahead, we're highly enthusiastic about the opportunities presented by next-generation consoles, which are launching in November. We have a robust development pipeline of new intellectual properties and offerings from our proven franchises, including multiple unannounced titles planned for release during fiscal 2015. In addition, we'll continue to invest to enhance our profitability with innovative digitally delivered offerings for both traditional and emerging platforms.
Our company has all of the assets necessary for ongoing success, including world-class creative teams, the strongest portfolio of intellectual property in the business, cutting-edge technology, and a sound financial foundation. We're better positioned than ever to deliver returns for our shareholders and expect to be profitable on a non-GAAP basis in fiscal 2015 and every year for the foreseeable future. I'll now turn the call over to Karl.
Thanks, Strauss. Today, I'll give an update on our recent releases and development pipeline. I'd like to begin by joining Strauss in congratulating Rockstar Games on their phenomenal launch of Grand Theft Auto V. Enhancing this incredible experience is Grand Theft Auto Online, which had its initial rollout on October 1st. This ambitious undertaking offers a dynamic and persistent online world and is available free with every copy of Grand Theft Auto V. It currently shares gameplay features, geography, and mechanics with Grand Theft Auto V, but will continue to expand and evolve over time with new features and functionality, as well as new content created both by Rockstar Games and the Grand Theft Auto community. This is the beginning of something new and exciting, and we're very enthusiastic about the opportunity for Grand Theft Auto Online to enhance consumer engagement with the series over time.
Featuring NBA MVP LeBron James on the cover, NBA 2K14 launched on October 1st. According to Metacritic, it is currently the highest-rated sports game of 2013 on both PlayStation 3 and Xbox 360. ign.com remarked that "NBA 2K14 is simply the best hoop sim ever." Incorporating the series' signature realism, intuitive new controls, and unique game modes, this year's release cements NBA 2K's legacy as the industry's premier sports simulation experience. The title is being supported by NBA 2K Everywhere, our multi-platform offering that gives fans the opportunity to enjoy NBA 2K via a mobile companion app, as well as a full-featured version of the console simulation game for tablets and smartphones. NBA 2K14 will also be our first release for the PlayStation 4 and Xbox One on November 15th and 22nd, respectively.
Built entirely from the ground up for next-generation platforms, NBA 2K14 features our revolutionary new Eco-Motion game engine and four entirely new experiences, including NBA Today, MyCareer, MyGM, and MyTeam. ign.com voiced their anticipation, stating, "NBA 2K14 could end up being the most technically impressive launch game on either next-generation platform." With unparalleled true-to-life visuals and a groundbreaking feature set, we believe NBA 2K14 will define the standard for next-generation sports simulations. I'd like to congratulate the teams at 2K and Visual Concepts for delivering two uniquely different basketball experiences of the highest quality, built specifically to leverage the strengths and features of both the current generation and next-generation consoles.
On October 8th, Borderlands 2 further expanded its audience with the release of the Game of the Year Edition, which offers an outstanding value to consumers, including the full game, all of the season pass add-on content, two additional character classes, and more. Demand for Borderlands 2 and its add-on content remains strong for more than a year after its initial launch. We remain committed to supporting the franchise with additional high-quality content. On October 22nd, 2K and Gearbox released the first offering in the new Headhunter series, Headhunter 1: T.K. Baha's Bloody Harvest, with two more add-ons planned for the release during 2013. Borderlands 2 has sold in over 7.5 million units and counting and is on track to becoming the highest-selling title in 2K's history. Today, 2K successfully launched WWE 2K14, the latest offering in the popular WWE video game franchise.
The title is being supported with a comprehensive selection of downloadable content, including roster additions, fan-favorite gameplay, and customization options, which will be available next month through January. This add-on content, which can be purchased individually or through the game's season pass program, provides the ultimate WWE video game experience that is perfectly timed for the holiday season. On November 12th, Firaxis Games will launch "XCOM: Enemy Within," the expansion for our Game of the Year award-winning strategy title, "XCOM: Enemy Unknown." "XCOM: Enemy Within" provides players with an array of new narrative situations, abilities, weapons, maps, tactical and strategic gameplay, and multiplayer content.
The title can be enjoyed with previously purchased copies of "XCOM: Enemy Unknown" on the PC and Mac and will also be available as a standalone game for Xbox 360 and PS3 under the title "XCOM: Enemy Within – Commander Edition." IGN called "XCOM: Enemy Within" one of their most anticipated games of the year, and forbes.com stated, "XCOM: Enemy Within is a fantastic expansion to one of 2012's best games." This year, 2K will continue to release downloadable add-on content to support "BioShock Infinite" and "Sid Meier's Civilization V." These include "BioShock Infinite: Burial at Sea," a two-part add-on campaign set in the underwater city of Rapture before its fall, and the "Sid Meier's Civilization V: Scrambled Nations pack," which will include maps from Canada, Australia, Japan, Scandinavia, Great Britain, France, Turkey, Italy, Russia, and China, and features randomized interiors with the start of each new game.
Looking ahead to fiscal 2015 and beyond, we have a strong development pipeline for both traditional and emerging platforms, including revolutionary new intellectual property and offerings from our existing franchises. Last January, we purchased the intellectual property for "Evolve" from THQ. This next generation title is currently in development at Turtle Rock Studios, the renowned creators of the innovative cooperative first-person shooter, "Left 4 Dead." 2K recently opened a new Bay Area studio focused on developing an exciting next-generation title. These represent just two of the more than 10 unique titles in our pipeline for next-generation consoles, which includes multiple releases planned for fiscal 2015. We understand and appreciate that both our consumers and shareholders are eager to learn more about our release schedule, and we expect to begin unveiling titles during the next several months.
Throughout the past year, we've demonstrated that success in our industry is achieved by mindfully balancing the passion to take creative risks with prudent business management. The need to deliver the highest quality entertainment has never been more important, and we believe that consumers will continue to seek the most groundbreaking and immersive experiences as we enter the next generation for our industry. Take-Two is well-prepared to continue to raise the bar for creative excellence across all platforms that consumers choose to embrace. I'd like to join Strauss in thanking all of our employees for their dedication and hard work during the quarter. Thanks, I'd now like to turn the call over to Lainie.
Thanks, Karl, and good afternoon, everyone. Today, I'll review our results for the fiscal second quarter, then discuss our updated outlook for fiscal 2014 and our initial outlook for the fiscal third 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. Note that our GAAP results exclude net revenue and cost of goods sold related to selling of the Grand Theft Auto V game during the second quarter. Grand Theft Auto Online, a free game available with every copy of Grand Theft Auto V, launched during the fiscal third quarter. Our press release provides a reconciliation of our GAAP to non-GAAP measurements. Starting with our results for the fiscal second quarter, net revenue increased 340% to a record $1.27 billion.
This exceeded our outlook range of $750 million-$800 million due to the blockbuster worldwide success of Grand Theft Auto V. Catalog sales accounted for $118.9 million of net revenue, led by Grand Theft Auto IV and offerings of Borderlands 2 and Civilization V. Revenue from digitally delivered content grew 85% year-over-year and accounted for $105.5 million of net revenue. The largest contributors were the Grand Theft Auto series, particularly digital sales of Grand Theft Auto V, and offerings for Borderlands 2, Civilization V, and BioShock Infinite. Gross margin decreased 4.5 percentage points to 39.2%, due primarily to higher software development costs and internal royalties.
Operating expenses were approximately $159 million, up by about $47 million, due primarily to higher marketing expenses to support the launch of Grand Theft Auto V. Interest in other expense was $3.8 million. Non-GAAP net income was $325.6 million or $2.49 per share as compared to $10.2 million or $0.11 per share in fiscal second quarter 2013. This result exceeded our outlook range of $1.20-$1.35 per share. On a GAAP basis, we reported a net loss from continuing operations of $124.1 million or $1.40 per share. Turning to some key items from our balance sheet at September 30, 2013, as compared to June 30, 2013. Our cash balance increased to $661.9 million. Our accounts receivable balance increased to $1 billion, primarily reflecting the receivables associated with the release of Grand Theft Auto V near the end of the second quarter.
Inventory increased to $84 million, primarily for inventory on hand for replenishment orders of Grand Theft Auto V and the launch of NBA 2K14 in early October. Software development costs and licenses decreased to $233 million, reflecting the amortization of development costs for our second quarter releases. In August, we completed the redemption of our 4.375% convertible senior notes due 2014, which we had called for redemption on June 12th. The company settled the 4.375% notes, which were surrendered for conversion for approximately $166 million in cash and 3.2 million shares of common stock. In conjunction with the redemption, we unwound the call spread associated with the notes, which resulted in the company receiving approximately $29 million in cash. Now I will review our financial outlook for the full year and third quarter fiscal 2014, which is all provided on a non-GAAP basis.
We are increasing our financial outlook for fiscal 2014 to reflect our strong second quarter results and positive outlook for the remainder of the year. We now expect non-GAAP net revenue to range from $2.2 billion to $2.3 billion, and non-GAAP net income to range from $3.50 per share to $3.75 per share. These would be record results for our company. Turning to the details of our full-year outlook, our expected revenue range assumes the on-time release of the titles we have planned for launch during the remainder of fiscal 2014. We expect the revenue breakdown from our labels to be roughly 70% from Rockstar 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 flat.
Selling and marketing expense is expected to be about 11% of net revenue based on the midpoint of our outlook range. We project interest in other expense of approximately $12 million, tax expense of about $16 million, and weighted average fully diluted shares of approximately 126 million. This reflects weighted average basic shares of approximately 91 million, 9 million participating shares for our 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 third quarter of fiscal 2014, we expect non-GAAP net revenue to range from $650 million to $700 million and non-GAAP net income to range from $1.20 to $1.35 per share. The majority of our revenue in the third quarter is expected to come from Grand Theft Auto V, NBA 2K14, WWE 2K14, and Borderlands 2.
We expect third quarter gross margins in the mid-40s. Total operating expenses are expected to increase by approximately 15% from the prior year's third quarter, driven primarily by higher sales and marketing expense. Selling and marketing expense is expected to be about 10% of net revenue based on the midpoint of our outlook range. Our third quarter outlook also reflects interest in other expense of approximately $2 million, tax expense of about $7 million, and weighted average fully diluted shares of approximately 131 million. This reflects weighted average basic shares of approximately 93 million, 11 million participating shares of our unvested stock-based compensation awards, and 27 million shares representing the potential dilution from our convertible notes under the if-converted method of accounting. In closing, the consistent execution of our strategy, along with a disciplined approach to capital investment, has enabled Take-Two to achieve strong results.
We are well-positioned to capitalize on the next generation of consoles, as well as emerging markets and platforms, and most importantly, to deliver consistent profits and returns for our shareholders over the long term. I would like to thank our employees for their tireless commitment to excellence and working together to bring continued success to our organization. Thank you. I'll turn the call back to Strauss.
Thanks, Karl and Lainie. On behalf of our entire management team, I'd like to thank our colleagues for their efforts in delivering a history-making quarter for our company. To our shareholders, I'd like to express our appreciation for your continued support. We'll now take your questions. Operator?
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Thank you. Our first question comes from the line of Justin Post with Merrill Lynch. Please proceed with your question.
Thank you. Congratulations on the launch of GTA. You obviously have a huge installed base growing, a record installed base. Can you talk a little bit about the gameplay activity that you're seeing either online or just in total relative to other huge hits like Call of Duty and Battlefield? How do you think about leveraging that activity into some digital sales next year? The second question is, as we enter the next generation transition, does that create any interruptions or disruptions with Rockstar's game pipeline? Is it still possible to see a consistent one release per year? Thank you.
Hi, Justin. It's Karl. In terms of the online activity for GTA, obviously we haven't spoken about specifics, but needless to say, we've had a very positive response, and there are many players playing at this point. It's going very well, and we've gotten terrific feedback from the community in terms of things that they really love about it. We're very excited about the opportunity for GTA Online. It's something that we think is very special and unique and is going to be with us for a very long time in the future. In terms of monetization, Rockstar has talked about monetization, and there are cash backs available. They're not available right now, but they will be turned on back again at some point in the near future.
In terms of, this is Strauss speaking, your second question. We try not to pat ourselves on the back overly. I do think history says that we managed the console cycle reasonably well in terms of delivering our products at the right time, and I think the release window for GTA V was phenomenal. There's an enormous install base, massive anticipation, and virtually no significant competitive releases. I was questioned an awful lot, you may recall, about the timing of that release, and I think Rockstar made a great decision in putting it out when they did and really optimized the intersection of what a great game can do and what an audience wanted and when they wanted it. We now come to the end of our current-gen releases at exactly the right time at this company.
As we said today, we have more than 10 titles in development for next-gen, and we're confident enough about that pipeline that we're calling for profitability on an ongoing basis, something that none of us around here does lightly and something that all of us around here are really proud about. Rockstar and 2K both are operating within the reality that we have two platforms launching in November about which we're all really excited, and we have great titles coming up.
Great. Thanks, congrats again on the unit number.
Our next question comes from the line of James Hardiman with Longbow Research. Please proceed with your question.
Hey, thanks for taking my call. Congrats on some pretty unbelievable numbers here. Help me, in whatever way you can, bridge the gap between $1 billion in 3 days and 29 million units sold life to date. How much of that 29 million was second quarter versus third quarter? How much was sell-in versus sell-through? Can you give us a sell-through number at this point? Can you help us out with the ASP? Ultimately, I guess one of the things that would be really helpful for us is just figuring out how much inventory is sitting at retail as we sit here today of Grand Theft Auto.
Hey, James, it's Lainie. We really can't give out additional information than what we've said to date. I can just point you to the $1 billion is a retail figure. The 29 million units is a sell-in number, and that's what we've done to date, and the $1 billion was in the first 3 days. There's big differences between those two numbers.
Right. I guess that's sort of the point. I guess, let me ask it a different way. Are you sitting on a bunch of inventory as we sit here today, which would assume that the retail number isn't anywhere close to that 29 million unit number? I guess, asked a different way, as we think about your second quarter guidance, do you continue to assume that you're going to be shipping copies of GTA in the December quarter?
Yeah, it's a fair question. The industry, in general, has been very tight on inventory as they head into the end of the cycle. We don't comment on our own inventory levels around here. In terms of our expectations going forward, yes, we fully expect to keep selling lots and lots of this game. I think the fact that we've sold in more than 29 million units to date in 6 weeks is pretty extraordinary. Demand remains very, very strong indeed. I think it's a fair question because I think some people have asked us to put a finer point than you did on your question. Is this just a reflection of all the demand being pulled current? There's just no evidence that that's the case at all.
It's not as though consumers say, "The Next Gen is coming, so I have to buy this title, and then I'm never going to buy it again." It's not how they operate. This is a reflection of our fondest hopes coming true, which was the intersection of a massive install base with a massively popular title.
Very helpful. Lainie, maybe you can help us a little bit with just the accounting of how all of the development costs associated with GTA are going to work. What portion of those costs, I know you're not going to give us a number, a total budget, but can you help us with what portion of those costs have already been expensed and how we should think about the rest getting expensed as we move forward? As we think about the DLC portion, and I guess more specifically the online portion, were those development costs capitalized, and are they going to be expensed along with development costs for the individual game? How should we think about all that?
For the development cost, the way we'll look at it is on a non-GAAP basis, it will be with the revenue. We take the revenue for the period, we'll take what the estimated lifetime revenue is, the expenses will be spread over that period of time for the non-GAAP basis. The online development costs also have been capitalized alongside the online game, will be spread along with the revenue.
I guess to ask it a different way, what's sort of your assumption with regards to the "lifetime" of the game, or as we move forward, presumably margins get better, right, as we burn off the majority of those development costs. When does that sort of end? At what point in the future are you projecting to have expensed through all those development costs?
Yeah, we actually don't guide that tightly. Basically, what Lainie's saying is on a non-GAAP basis, we aim to match the revenue and the development costs in the initial cycle of releases. You're absolutely right. When something rolls off into our catalog, we're no longer amortizing development costs. We typically don't have marketing costs, and therefore, the gross margin would indeed be higher. We're not quoting any specific timing or numbers today.
Yeah. Each quarter, we'll update our estimated lifetime for the product, and that can adjust what the capitalized cost for amortization is. Basically, it's over what that lifetime is estimated to be, and that can change over time.
Ultimately, as it hits your catalog, it hits your catalog and ultimately has no cost profile associated with it, apart from the cost of actually shipping the goods on an ongoing basis.
The profile of sales is based on what we know today as opposed to what you guys were projecting initially for the game?
We would update our estimates every time. Based on the way the title launched, and I'm saying that it performs better than our expectations, yes, the lifetime would probably also be adjusted each quarter.
Got it. Helpful, congrats on some amazing numbers, guys.
Our next question comes from the line of Ben Schachter with Macquarie. Please proceed with your question.
Congratulations to everyone on truly unprecedented results. A few questions on digital and then one for Lainie on the cash. On the digital, would you say that this is the biggest ever full game download digital title? What was the split between PlayStation and Xbox? Then also, what does that mean for the margin of those digital titles? Then just separately, thinking forward about the digital opportunity, I just want to make sure that I understand how to think about it correctly. I think about it in kind of three pieces. You have the full game downloads, you have the digital episodic content that potentially could come for GTA V, and then separately, GTA Online. Is that the correct way to think about it? Then one follow-up for Lainie.
Ben, do you mean by biggest download, the biggest size download or the biggest number of downloads?
I guess either revenue or number of downloads for a full game.
I don't think we actually know the answer to the first question. I suspect it probably is the biggest game that was ever downloaded.
It was certainly the biggest on the PlayStation Network on the day of release.
Yeah.
It was the biggest at first day on platform. Other than that, we don't know.
In terms of the number of bytes, I suspect it's also the biggest, but I could be wrong about that. We've talked about margins before. We basically said our margins on digital distribution are somewhat higher than on physical distribution, but not meaningfully higher, typically. In terms of the way you parsed digitally delivered revenues here, yes, you've got it correctly, and I suppose I'd add to that, ultimately, catalog. Full game downloads, DLC, and in-game payments, that would all constitute digitally delivered revenue.
Great. Lainie, if I just follow up on the cash. Based on the guidance you've given, where do you expect the cash balance to be by the end of 2014? If any of you want to update us on your thoughts about potentially returning excess cash to shareholders, that would be great.
For the cash balance, we don't provide cash flow projections. We are going to be cash flow positive for the remainder of the year from this point forward, as well as the whole year. Your last question was the use of cash? As we said before, we've been investing in our business, looking at acquisition opportunities. If we think it makes sense, we have authorized a share repurchase program. If the opportunity presents itself and it makes sense for us, that could be an option for us as well.
Great. Well, congratulations again.
Our next question comes from the line of Eric Handler with MKM Partners. Please proceed with your question.
Yes, thanks for taking my question. A couple follow-ups to Ben's questions. First of all, what percentage of the 29 million units sold for "GTA" were full digital downloads? Secondly, when you look at your buyback, looks like you haven't done any share repurchases yet, but given how strong your earnings were and your confidence in the business, is there a reason why, I would assume you think your shares are relatively inexpensive, why you're not buying back stock? Third, with "GTA Online," as more people start migrating over time to the next-gen platforms, will next-gen players be able to access "GTA Online"?
Yeah. We said that in the quarter, about 8% of our revenue was from digitally delivered offerings across the board. We're not talking specifically about "GTA V's" percent related to digitally delivered revenue, but I think that gives you a certain amount of guidance, obviously. In terms of share repurchases, we didn't repurchase any stock in the fiscal quarter. We do have an authorized stock repurchase outstanding, and we do have ample capital to pursue all the opportunities that Lainie outlined. We are a very conservative management team, and as we head into a platform transition, companies with meaningful, strong balance sheets are well-positioned, and that's very important to us. First and foremost, we want to be rock solid around here. Secondly, we are looking at, and always have looked at, accretive M&A. Let me emphasize accretive. Accretive is not in the eye of the beholder.
We're interested in accretive M&A that fits with our core business. Third, of course, over time, one must and should look at returning capital to shareholders in an appropriate way. There are numerous ways that that can be achieved.
Eric, in terms of "GTA Online" for next generation, I think was your question?
Yes.
We haven't discussed any plans for "GTA" at all related to next generation. Nothing to say there.
Okay. 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. Strauss, looking again at the opportunity to monetize the large install base of "GTA V," I recall last time around with "GTA IV," when you released expansion packs, whether they were digital or offered on disk, like "The Lost and Damned," one issue was that they came out significantly later than when the game did, and I believe you made a comment at that time that that was one of the lessons learned, to get those kind of expansion packs out sooner. Since that time, a trend has emerged among other large games to sell sort of a season pass to a series of announced expansion packs, which many people have the opportunity to buy when they buy the game in the first place.
You have a large install base, 17 million, 20 million people who already have the game who didn't get that opportunity. Can you speak to, I know you don't want to give the exact roadmap, but what the opportunity to sell add-on content to the single-player campaign as opposed to the microtransactions, is that still in the cards, or can you give us a little bit of color on what might we see there? Thanks.
We always prefer that our labels talk about our marketing plans, and we tend not to discuss them on the call. I appreciate the thoughtful question, and we give a lot of thought to just the questions you raised. I think the biggest difference here is, than the last release is, when Rockstar came out with downloadable content for "GTA 4," this was groundbreaking stuff. It had never been done before, and they took a big creative risk and delighted consumers and made money in the process. It was really a great result. We at this company and our labels specifically have learned a lot about what consumers want. What we find is when you have a hit product, there is an opportunity to continue to delight consumers with ongoing content. That always remains our focus.
Our focus around here does not start with how do we look at our consumers, they showed up in droves, and how do we extract more money from their pockets? We genuinely don't. What we think about is the reason our consumers showed up is because we delighted them in a way that they didn't expect. As high as their expectations were, we blew them out of the water, and we did that because of the extraordinary creative work done at Rockstar. That's the way this company operates. Having done that, we think, okay, now what is the appropriate way to price this experience so that we can appropriately compensate all of our stakeholders, the people who create the products, the employees who work at this company, and of course, our shareholders.
We've always looked at pricing all of our content with an eye towards giving people more than they pay for, trying to over-deliver. "GTA Online" is free with the game, and first time we've ever done anything like this. It's incredibly ambitious and taxing and challenging, and consumers love it, and they're showing up in great magnitudes. As Karl said, there is currency in the game, and there are plans at some point to make that currency available for cash payments, in addition to other ways that you can earn currency in the game. We're going to let Rockstar talk more about that. We don't need to talk more about that today. For sure, we're commercial folks, and we are in business.
Where we start here is with a passion for what we do, then we think about how what we do is going to delight consumers, and then, and only then, do we think about how we're going to monetize it.
Thanks. A follow-up to that question, perhaps for Lainie. Is the cost of maintaining "GTA Online" a material part of your OpEx going forward, or does that sit in COGS? Can you give us a scale of how big an ongoing cost maintaining the servers and systems around that platform are? Thanks.
The cost will be capitalized and then spread over the revenue stream, included with the overall capitalized software for Grand Theft Auto. It is a good question in terms of how much that's going to be going forward. There will be some of it, the server costs and things like that in the OpEx, but most of the time and effort by the teams will be included in the capitalized software.
Let me just emphasize, one of our stated strategies is to be the most efficient company in the business. We did not go out and build a massive infrastructure to support something before we understood where consumers were going to be. We are learning every day how to do this in a high-quality way. There will be some costs associated with it. We have zero doubt that the revenue will vastly exceed any operating expense.
Thank you.
Our next question comes from the line of Arvind Bhatia with Sterne Agee. Please proceed with your question.
Great. Thank you. First, I'd like to congratulate all of you guys as well on the success. Most of my questions have been answered. Just a couple of small ones. One, as you talk about your next gen and the 10 titles in development, I assume you have now a pretty clear picture of what the initial dev costs are going to look like in your plans. Directionally, I'd like to just get some comfort level on how these costs are shaping up versus your expectations versus perhaps the last cycle, et cetera. Any changes to your thinking? Lastly, just a quick update on Asia and what's going on there and opportunities that you see in the coming quarters and years. Thank you.
Yeah. In terms of dev costs for the more than 10 next gen titles we have in development, we do spend meaningfully on our games. That's how we have the highest-rated games in the business. We don't so far see meaningful differences in what it's going to cost to develop for next gen versus what it's been costing to develop for current gen. In terms of Asia, what we've said is that "NBA 2K Online" is one of the top 10 played games in Internet cafes, according to QQ Games in China. We're very happy with those results and continue to be closely engaged in optimizing and contemplating expanding that throughout other parts of Asia. We have our baseball game in Korea. That's operating as well, and we continue to develop another game in Korea, "Civilization Online," which we've talked about previously. That's still in development.
It remains a very interesting area for us, and it's nice to have two games in market.
There was talk about consoles in China recently. I wonder if you think that that is really an opportunity. I know this is just talk right now, but do you really see that as an opportunity for you in the future?
Well, so far, consumers in China really haven't had the opportunity. They've played online, and they play very avidly online, but that is typically a free-to-play model where you monetize less than 10% of the audience. It remains to be seen how consoles will do in China. It also remains to be seen what kind of intellectual property protection will be offered in the country. That has been challenging, and it doesn't come as a surprise to anyone. We'll be interested in both. If there's an economic opportunity and we can pursue it while keeping our intellectual property secure, we have a presence there. We have a lot of people on the ground. We have multiple offices. We'd be just thrilled. It's a great place to do business. It remains to be seen.
Remember, our stated strategy is to be where our consumer is, without regard to platform, without regard to type of game, without regard to genre, and without regard to business model. We're ecumenical on all of those topics. We're not rule-driven around here. Our goals are simple: Be the most creative, most innovative and the most efficient company in the industry.
Thanks, and congratulations.
Our next question comes from the line of Mike Hickey with The Benchmark Company. Please proceed with your question.
Hey, guys. Thank you for taking my questions, and, again, congratulations to the Rockstar Games team for an incredible game. I know you're sensitive to this, but obviously, the online piece is pretty important, I would think, to your FY 2015 profitability. Can you give us any sense, and obviously, there's excitement and buzz from it, but it was also somewhat glitchy from the beginning, which I think the Rockstar Games did a pretty good job at kind of communicating that it was going to be a work in process, but any sense of just kind of general engagement metrics that we can look at as we try to shape this sort of forward performance opportunity in terms of player conversion, in terms of ARPU, in terms of maybe how you would look at this game, how it performed versus an MMO in China?
Mike, I got, I think, half the question. I'm going to ask you to repeat the second half. In terms of GTA Online as a financial contributor, this is new and untested so far, and we haven't assumed meaningful revenue. We'd be very grateful if it comes along. What we're focused on is delivering a terrific experience, and it remains to be seen what kind of contributor it is. Our expectations about profitability in 2015 and forward are not at all related to GTA Online, to be specific. Your second question was?
I guess just some sort of engagement metrics. Do you plan to provide us, moving forward, any sort of like payer conversion or ARPU? Are those sort of considerations that are going to help us kind of shape what this thing could generate in terms of performance?
We try to be as transparent as possible, and if we have meaningful contributors to our revenue and profitability, then we aim to provide transparency. It remains to be seen. Right now, it's not a topic we need to address.
Just curious on just general engagement overall. Initially, people going into the online experience, are you seeing it kind of drop off as there's this continual balancing? Are people actively playing it? Is it growing? Any sort of insight there would be helpful.
Hi, Mike, it's Karl. Like I said before, we're not discussing what the specific numbers around engagement at this point, but as I mentioned earlier in the call, there are many people playing it. The engagement has been very high, and the feedback has been extremely positive, and we couldn't be more pleased where we're sitting right now with this exciting opportunity. I just don't have any specifics to share with you right now.
Okay. For fiscal 2015, just thinking, obviously, you expect to be profitable here for a period of time. Just thinking about fiscal 2015, how much is that catalog performance cost control versus having to get new games to the market and outside of maybe the ones that are pretty easy to model? We're all trying to get an idea of the key drivers for fiscal 2015. I think it's pretty easy to know that NBA and WWE and some of these online experiences are going to be contributors, but how important are the unannounced games in terms of driving performance?
It's a great question. Our catalog does provide a nice backbone for our business. We have the highest performing catalog per SKU in the business, and that's driven by our very high Metacritic ratings. Our consumers keep buying our titles, and they keep buying the titles even after transitions of platforms. We remain optimistic about our catalog going forward and digitally delivered offerings foot with that because one of the things that digital distribution does is makes your catalog more available. That said, our plans for 2015, in fact, reflect a robust release schedule of next-gen titles. We've said that we have more than 10 in development. Generally speaking, in order to deliver the kind of results we hope to deliver and want to deliver, we do need and expect to have new tent pole releases.
All right, thanks, guys.
As a reminder, ladies and gentlemen, if you would like to ask a question, press star 1 on your telephone keypad. Our next question comes from the line of Brian Fitzgerald with Jefferies. Please proceed with your question.
Thanks, guys. Maybe a follow-on to that last question. With your impressive catalog library, are there any unique dynamics you see to catalog sales as you roll through a hardware transition? On launches like GTA V, what kind of impact or positive pull-through do you see on a GTA catalog with that type of event? Thanks.
Hi, Brian, it's Karl. Your first question was about dynamics on catalog in a console transition.
Yes.
Is that correct? Okay.
Yep.
We haven't really seen a lot of dynamics that we could specifically relate to a console transition in terms of catalog. What we are seeing is the amount of digital activity in our catalog is increasing over time, and we stated that in the past. To specifically say that this is related to a console transition, we can't really see that at this point. The second question, I'm sorry, I apologize again, what was it?
Just what GTA V and catalog have to do with one another. The GTA series continues to sell extraordinarily well years and years after its release. In this past year, we put out the 10th year anniversary edition for GTA III on tablet, and that did great for us. We've talked about that before. Console transitions don't hurt our catalog particularly. People keep playing old titles on old consoles that they still have even when they buy new consoles if the titles are good enough. There's an element of nostalgia, but only for the best titles. We have high hopes for our catalog, and digital distribution obviously provides another opportunity, and there are other platforms, whether that's Steam or whether that's any number of other opportunities to release our catalog.
Great. Thanks, guys.
Mr. Zelnick, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.
Well, once again, thank you so much for joining us. I just want to take one last moment to express our gratitude to all of our colleagues all over the world for the extraordinary quarter, our outlook for the year and just how well this company is doing. We feel like we're firing on all cylinders, and we're grateful to all of our colleagues for making that happen. Thank you for joining us.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.