Take-Two Interactive Software Inc (TTWO) — Q2 2015 Transcript

Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the second quarter of fiscal year 2015 ended September 30, 2014. Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks. Before we begin, I'd like to remind everyone that the statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors. These important factors are described in our filings with the SEC, including the company's annual report on Form 10-K for the fiscal year ended March 31, 2014, including the risk summarized in the section entitled Risk Factors and in the company's quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2014. I'd also like to note that, unless otherwise stated, all numbers we will be discussing today are non-GAAP. Please refer to our earnings release for a GAAP to non-GAAP reconciliation and further explanation. Our earnings release and filings with the SEC may be obtained from our website at www.take2games.com. And now I'll turn the call over to Strauss.

Thanks, Hank. Good afternoon, and thank you for joining us today. I'm pleased to report that for the ninth consecutive quarter, Take-Two delivered better-than-expected results, which further illustrate our company's continued positive momentum. Key drivers for the period were strong catalog sales led by Grand Theft Auto V, NBA 2K14, and Borderlands 2, and continued growth in digitally-delivered revenue from our current consumer spending, particularly for Grand Theft Auto Online. Grand Theft Auto V remains our company's and industry's standard bearer for creative and commercial excellence. More than a year after its record-breaking launch, the title is still captivating new audiences on PlayStation 3 and Xbox 360, and we believe its enduring popularity will grow even stronger when the title makes its November 18 debut on PlayStation 4 and Xbox One. NBA 2K14 and Borderlands 2 also continue to attract new fans and generate meaningful revenue from our current consumer spending, long after their initial release dates. Their ongoing success underscores the durability of our key franchises and demonstrates that customers remain engaged with our highest-quality titles for prolonged periods of time and then eagerly return on day one to experience each new iteration. The diverse array of other titles also contributed to catalog sales during the quarter, including the Grand Theft Auto series, WWE 2K14, Sid Meier's Civilization V, Red Dead Redemption, and BioShock Infinite. Our deep catalog of must-have titles is an important competitive advantage and provides a predictable contribution to our results. During the second quarter, $89.8 million of our non-GAAP net revenue was digitally delivered. Importantly, nearly 60% of this revenue was derived from recurrent consumer spending which grew 45% year-over-year. We continue to see strong consumer engagement with Grand Theft Auto Online, which has both exceeded our expectations and has been the single largest contributor to digitally-delivered revenue in every quarter since its launch. During the second quarter, Rockstar Games released two updates, including The San Andreas Flight School Update and The Last Team Standing Update. The ongoing release of new content for Grand Theft Auto Online keeps consumers immersed in the game's vast open world, and we remain highly enthusiastic about its future, including the upcoming launches on PlayStation 4, Xbox One, and PC. Recurrent consumer spending for NBA 2K also grew during the second quarter, with revenues up approximately 135% year-over-year. We expect that online play and virtual currency will continue to be important contributors to the success of our industry-leading basketball franchise. A variety of other offerings also contributed to recurrent consumer spending in the second quarter, including downloadable add-on content for Borderlands 2 and other titles, NBA 2K online in China, and in-game spending on WWE Supercard, which has been downloaded more than 3.5 million times and has quickly become 2K's most financially successful free-to-play mobile offering. Continuing to create opportunities that drive ongoing engagement with our titles after release is a high-margin growth opportunity for our company and a key strategic focus of our teams. We've only scratched the surface when we plan to support our future releases with innovative offerings designed to drive recurrent consumer spending. Full game downloads across console, PC, and mobile platforms also contributed to digitally-delivered revenue. During the second quarter, we expanded our offerings for tablets and smartphones with the release of BioShock and Sid Meier's Civilization Revolution 2 for iOS. We're committed to providing our products on all relevant platforms, regardless of the screen size; and to all distribution channels, both physical and digitally delivered. Our fiscal third quarter is off to an excellent start with one of the strongest and most diverse holiday lineups in the history of our company. The initial response to our recent releases including NBA 2K15, Borderlands: The Pre-Sequel, Sid Meier's Civilization: Beyond Earth, and WWE 2K15 has been outstanding, as Karl will discuss shortly. Through the tireless passion and dedication of our teams, we've been able to accomplish the challenging task of simultaneously delivering four AAA titles within a single month, supporting them with world-class marketing campaigns, and executing seamless global distribution. In doing so, 2K has further exemplified its impressive capacity for growing its business by delivering multiple high-quality products and building leading franchises, and there's more to come. As a result of our better-than-expected second quarter performance, strong current business trends, and positive outlook, we've raised our revenue and earnings expectations for fiscal 2015, which is on pace to be one of our best years ever. Looking ahead to fiscal 2016 and beyond, we have a robust pipeline of 'yet to be announced' titles in development, including both groundbreaking new intellectual properties and new releases from our established franchises, coupled with digitally-delivered offerings designed to drive recurrent consumer spending. Our company is better positioned than ever to continue delivering long-term growth, profits, and returns for our shareholders. I will now turn the call over to Karl.

Thanks, Strauss. Today I'll provide an update on our recent releases and lineup for the remainder of fiscal 2015. On October 7, 2K launched NBA 2K15 and further cemented the franchise's undeniable legacy as the #1 basketball experience in our industry. Developed by Visual Concepts and available for prior gen, next gen, and PC, NBA 2K15 has been lauded by consumers and media for once again raising the bar for sports realism and gameplay. This year's Xbox One and PlayStation 4 versions offer a variety of new features, including revolutionary 3D facial scanning, which enables players to put themselves into the game while living the life of a player in MyCAREER, becoming the face of a franchise in MyGM, or playing with friends online in multiplayer modes. Fans of NBA 2K15 also can engage with the game on their tablets and smartphones through the full-featured mobile version and the MyNBA 2K15 companion app. NBA 2K15 has enjoyed the strongest launch in the history of the series, with both record first week selling and sell-through across all platforms, and currently, it is the highest-rated sports game released this year on PlayStation 4 based on Metacritic.com rankings. On October 14, 2K released Borderlands: The Pre-Sequel for Xbox 360, PlayStation 3, and PC. The title is off to a strong start, demonstrating that there's still a vibrant market for must-have prior gen titles. In keeping with the franchise's tradition of successfully driving recurrent consumer spending, Borderlands: The Pre-Sequel will be supported by four action-rich downloadable add-on packs, which also can be purchased together via a Season Pass. Borderlands continues to be one of our company's most popular franchises, and Borderlands: The Pre-Sequel is another great offering for diehard fans and newcomers alike. On October 23, 2K hit the ice with NHL 2K for iOS and Android. We are excited to provide hockey fans with a full-featured mobile gaming experience, consistent with our strategy of exploring select opportunities for tablets and smartphones. On October 24, 2K expanded the wildly successful Civilization franchise with the release of Sid Meier's Civilization: Beyond Earth for PC. The title features the core and tactical elements for which the series is famous, while propelling players beyond the traditional timeline of a Civilization game by exploring humanity's future on an alien world. Civilization: Beyond Earth is off to a great start and has garnered positive critical reception from influential press with Game Informer awarding it a score of 9 out of 10 and declaring the title a worthy bearer of the Civilization name and a must-play for strategy fans. Yesterday, 2K released WWE 2K15 for Xbox 360 and PlayStation 3, and also will bring the title for Xbox One and PlayStation 4 on November 18. Developed collaboratively by Visual Concepts and Yuke's, WWE 2K15 offers major gameplay enhancements, improved commentary, and a collection of the biggest roster of WWE superstars. For the first time in the history of the series, WWE 2K15 includes MyCAREER mode, a fan favorite from our NBA 2K series, which enables players to experience the life of a rookie WWE Superstar and rise to the ranks to earn a title shot at WrestleMania. The title will also be supported with an exciting array of downloadable content, including a Season Pass. The initial launch of WWE 2K15 is off to an encouraging start, and we expect a combined launch on prior gen and next gen to show meaningful growth versus last year's release. I'd like to congratulate 2K and their studios, Visual Concepts, 2K Australia, and Firaxis Games, as well as our external partners at Gearbox software and Yuke's, for delivering a stellar array of titles for this holiday season. Their commitment to excellence is evident within each release, and we are very proud of their contributions to our organization. Now, I'd like to discuss our upcoming pipeline. On November 4, 2K will release BioShock Infinite: the Complete Edition for Xbox 360 and PlayStation 3. Featuring the award-winning title and all of its previously released add-on content, The Complete Edition provides unprecedented value and is a must-have item for gamers who have yet to experience BioShock Infinite's graphically stunning world, deep and immersive storytelling, and heart-pounding action. On November 18, Rockstar Games will launch their record-shattering hit, Grand Theft Auto V on PlayStation 4 and Xbox One, with the PC version to follow on January 27, 2015. In addition to increased draw distances and higher resolution, players can expect a range of additions and improvements including new weapons, vehicles, and activities, additional wildlife, denser traffic, a new foliage system, enhanced damage and weather effects, and much more. Players returning from the PlayStation 3 and Xbox 360 versions will get access to a host of new, exclusive content, including rare versions of classic vehicles from across the Grand Theft Auto series, activities such as wildlife photography, new shooting range challenges, new weapons, and more. Included with Grand Theft Auto V is free access to Grand Theft Auto Online, which now will feature online play for up to 30 players on PlayStation 4 and Xbox One. The current community of players will have the ability to transfer their Grand Theft Auto Online characters and progression to their choice of either PlayStation 4, Xbox One, or PC. In addition, all content and gameplay created for both Grand Theft Auto V and Grand Theft Auto Online will also be available for the PlayStation 4, Xbox One, and PC with more to come. Rockstar Games will continue to support both Grand Theft Auto V and Grand Theft Auto Online with new offerings throughout the year, including regular content drops and limited-time event updates. Rounding out our fiscal 2015 lineup will be 2K's February 10 launch of Evolve for PlayStation 4, Xbox One, and PC. Developed by Turtle Rock Studios, Evolve is the only title in history to win Game of Show honors at both E3 and Gamescom in the same year. Consumer anticipation for Evolve continues to build, and starting tomorrow through November 2, the big alpha test for this unique 4 versus 1 multiplayer shooter will be available exclusively for 24 hours on Xbox One. In addition, the alpha test will be available on PlayStation 4 and PC from October 31 to November 2. While the alpha test is not fully representative of the final product, it will give our teams a chance to test the game in the hands of our most passionate consumers, and we will test it again in the open beta for Evolve, exclusively for Xbox One in January. We remain incredibly excited about the potential for Evolve. Looking beyond this fiscal year, we have a robust pipeline of titles in development. To date, we have revealed 2K's Battleborn, an all-new intellectual property developed for next gen and PC by Gearbox Software, the creative team behind our Borderlands franchise, which is planned for release during fiscal 2016. The title, which was featured on the August cover of Game Informer, is a blended-genre game that combines first-person shooting, cooperative combat, and an expansive collection of characters to deliver an all-new hero-shooter experience. We'll have more to announce about our future lineup in the months to come. In closing, I'd like to join Strauss in thanking our global teams for delivering a superb holiday lineup and continuing to execute our proven strategy of creating the most innovative and highest-quality titles in our industry. I'll now turn the call over to Lainie.

Thanks, Karl, and good afternoon, everyone. Today, I'll review our results for the second quarter and then discuss our outlook for the third quarter and fiscal 2015. All of the numbers I'll be providing today are non-GAAP results from continuing operations, and all comparisons are year-over-year unless otherwise stated. Our press release provides a reconciliation of our GAAP to non-GAAP measurements. Starting with our results for the second quarter. Net revenue was $135.4 million versus $1.27 billion in last year's second quarter, which had benefited from the record-breaking launch of Grand Theft Auto V. This result exceeded our outlook range of $95 million to $110 million due to stronger-than-expected catalog sales and digitally-delivered revenue, particularly from Grand Theft Auto V, Grand Theft Auto Online, Borderlands 2, the WWE 2K franchise, and NBA 2K14. Digitally-delivered revenue accounted for $89.8 million of net revenue versus $105.5 million last year. Revenue from recurrent consumer spending, including virtual currency, downloadable add-on content, and online games, grew 45% and accounted for 58% of digitally-delivered revenue. The largest contributor to digitally-delivered revenue were offerings for the Grand Theft Auto series, the NBA 2K franchise, Borderlands 2, and Sid Meier's Civilization V. Gross margin increased 19.4 percentage points to 58.6%, due primarily to lower internal royalties and a higher percent of digitally-delivered revenues. Operating expenses were $110.3 million, down by $49.2 million, as last year's second quarter included higher marketing expense for the launch of Grand Theft Auto V. Interest and other expense is $2 million, and non-GAAP net loss was $35.4 million or $0.44 per share as compared to net income of $325.6 million or $2.49 per share in fiscal second quarter 2014. This result exceeded our outlook range of a loss of $0.60 to $0.70 per share. On a GAAP basis, we reported revenue of $126.3 million and loss from continuing operations of $41.4 million or $0.51 per share. Turning to some key items on our balance sheet at September 30, 2014, as compared to June 30, 2014. Our cash and short-term investments balance decreased to $803.8 million. Our accounts receivable balance decreased to $25.4 million, primarily reflecting the collection of receivables. Inventory increased to $55.9 million due primarily to build up for our October releases, and software development costs and licenses increased to $327 million, reflecting the development efforts around our pipeline of upcoming releases. Now I will review our financial outlook for the third quarter and fiscal 2015, which is provided on a non-GAAP basis. Starting with the full fiscal year, as a result of our better-than-expected second quarter performance, strong current business trends, and positive outlook for our upcoming releases, we are increasing our outlook for both revenue and net income per share. We now expect net revenue to range from $1.4 billion to $1.5 billion, up from the prior range of $1.35 billion to $1.45 billion, and net income to range from $1.05 per share to $1.30 per share, up from the prior range of $0.80 to $1.05 per share. Turning to the details of our full year outlook. The majority of our revenue is expected to come from Grand Theft Auto V and Grand Theft Auto Online, NBA 2K15, Borderlands: The Pre-Sequel, WWE 2K15, and Evolve. We expect the revenue breakdown from our labels to be roughly 60% from 2K and 40% from Rockstar Games. We expect our geographic revenue split to be about 60% United States and 40% international. We expect gross margins in the mid- to upper 40s. Total operating expenses are expected to increase by approximately 7%, driven primarily by personnel expense on a higher headcount, higher professional fees, and higher depreciation expense. Selling and marketing expense is expected to be about 17% of net revenue based on the midpoint of our outlook range. And we project interest and other expense of approximately $9 million, tax expense is about $44 million, and weighted average fully diluted shares of approximately 114 million. This reflects weighted average basic shares of approximately 80 million, 8 million participating shares for unvested stock-based compensation awards, and 26 million representing the potential dilution from our convertible notes under the if-converted method of accounting. Interest on the convertible notes, net of tax, is approximately $7.4 million, which should be added back to net income to calculate net income per share under the if-converted method. We expect to generate cash during the second half of fiscal 2015 and as a result of our better-than-expected results, increased outlook and cash receipt from the sale of Twitch, we now expect to be approximately net cash flow neutral for the full fiscal year. We continue to expect to generate cash from operations in fiscal 2016. Turning to the fiscal third quarter, we expect net revenue to range from $745 million to $760 million, and net income to range from $1.35 to $1.45 per share. The majority of our revenue is expected to come from Grand Theft Auto V and Grand Theft Auto Online, NBA 2K15, Borderlands: The Pre-Sequel, WWE 2K15, and Civilization: Beyond Earth. We expect gross margins in the upper 40s. Total operating expenses are expected to increase by approximately 33% from the prior year third quarter, primarily due to higher marketing expense for our holiday releases. Selling and marketing expense is expected to be about 13% of net revenues based on the midpoint of our outlook range. Our third quarter outlook also reflects interest and other expense of approximately $2 million, tax expense of $32 million, and weighted average fully diluted shares of approximately 114 million. This reflects weighted average basic shares of approximately 80 million, 8 million participating shares and 26 million representing the potential dilution from our convertible notes under the if-converted method of accounting. Interest on the convertible notes, net of tax, is approximately $1.9 million, which should be added back to net income to calculate net income per share under the if-converted method. In closing, fiscal 2015 is poised to be among Take-Two's best years ever. We continue to benefit from top creative assets coupled with a sound financial foundation, which provide our organization the flexibility both to execute our core strategy and to capitalize on new opportunities for growth. We are well positioned to deliver non-GAAP profits every year for the foreseeable future and return to our shareholders over the long term.

Thanks, Karl and Lainie. On behalf of our entire management team, I'd like to thank our colleagues for their contributions to our success. To our shareholders, I want to express our appreciation for your continued support. We'll now take your questions.

A couple of questions on GTA V. When you think about the huge player base that's out there, do you think you can get a decent conversion among people to maybe try and buy GTA V? What's kind of your thinking around that? And then could you reiterate or repeat those digital numbers? Did you say half of your digital is coming from GTA V? Just want a clarification on that. And then maybe one for Lainie about the cash. Clearly going to be a year with solid earnings, where are you deploying some of that cash that's not really coming through on the cash flow statement?

Thanks, Justin. In terms of GTA V, obviously, having sold something like 34 million units of GTA V for what is now a prior gen, we know we're attracting a very significant core gamer audience and we also attracted people who are not core gamers. But we don't think we had 100% market share of everyone who had platforms, and so we do think there's an opportunity for people who haven't yet enjoyed the title to enjoy it for next gen. Equally, when you do buy a new platform, it seems to me that it would be very exciting to have one of the most important titles in the industry. But we tend to like to talk about this stuff after it's happened, not in advance. We're really proud of the lineup we've had. We're immensely proud of the achievements of the Rockstar team for GTA, and we're anxiously awaiting the November release. So we'll see how it goes. And Lainie can answer your question about digital, then I'll pick it back up on cash.

Okay. For digital, we said $90 million for the quarter was in digitally-delivered offerings, and 58% of that came from our recurrent consumer spending, which grew 45%, so we didn't specifically break out what GTA Online was, but that's the information we gave around the digital business.

And then just in terms of deploying our cash balance, we've said repeatedly that we've used and expect to use cash to support organic growth. It's been a good story on organic growth. In 2007, our apples-to-apples net revenue was roughly $700 million. This year, we're guiding to $1.4 billion to $1.5 billion. Last year was obviously well over $2 billion, and that's all been generated through organic growth. We are risk-averse folks. We don't intend to change that, and certainly don't intend to be profitable yet. But we do see growth opportunities that we now have the ability to avail ourselves of, especially as we head into what we believe will be very significant growth periods driven by these new consoles coming online. Secondly, we said we will contemplate accretive acquisition or inorganic growth. We've been very selective in anything that we've done so far. And thankfully, it's all worked out for us. But that is something we can now contemplate, but I want to emphasize that we're only interested in accretive deals, and I mean accretive within a reasonable period and accretive on a mathematical basis, not just a business model basis. And finally, we've shown a willingness to return cash to the shareholders. We had a very meaningful stock buyback last year, that's another opportunity as well. So minimally, there are three possible uses. I think it's also worth noting in our business that cash is a strategic asset. Like any entertainment business, there's an element of risk and volatility in our business that we've aimed very much to drive out. We definitely have a much more predictable and much less volatile business than we used to have years ago. But having a meaningful amount of cash does allow us to play through the inevitable ups and downs of our business and to avail ourselves of opportunities when they do arise.

Maybe one follow-up. Why would cash earnings be below operational earnings this year? Just trying to reconcile the difference between the cash flow statement and the income statement just for this year. It looks like kind of a difference between the 2 this year.

It's definitely a buildup of our development cost on our games and our strong pipeline going forward, that's what's causing the difference.

So growth in software development on the balance sheet?

Yes. Yes.

Could you discuss the current state of retail as we approach the holiday season? Are retailers willing to stock physical inventory? Also, are you noticing any hesitance as consumers increasingly switch to full game downloads?

It's Karl. We've actually seen a very robust retail market, and all of our retail partners have been enthusiastic about our titles. So to the extent there's any skittishness in the market, and we've heard rumblings of some of it, we haven't seen any of it at this point. So we're very sanguine on what the state of the market is. And frankly, there's nothing that we've been told by any of our partners that give us any significant concerns. So we think it's going to be a fantastic holiday season, and we're incredibly excited about the lineup that we have, which is a much bigger lineup than we're used to having at this time of the year. So we feel good.

Okay. And just one follow-up for Lainie. It looks like operating expenses came in a little bit lower than expected. Anything going on in there in terms of were those reallocated or maybe some permanent taking out of the business, or just talk a little bit about that.

In Q2, what we saw in operating expenses was a little bit lower in terms of our marketing expense, and it was some timing. So most of that marketing we'll see in the rest of the year in Q3 and Q4.

I wonder if you could comment on the decision to push GTA V on PC back to January and any impact that has on your guidance. And then separately, Borderlands: The Pre-Sequel, could you comment on how it sold or what the selling looked like relative to Borderlands 2? And then, I have a follow-up.

When we move a title, it's almost always the same answer, which is giving a title a bit more development time to make sure that it can be everything that it ought to be, and while we would prefer never to change release dates, it's proven to be a good move for us in general because we have the highest Metacritic ratings in the business, and that correlates with revenue and ultimately, of course, profitability. In terms of Borderlands: The Pre-Sequel, it's naturally available only for what is now prior gen. It's not available currently for next gen. We're very happy with the initial results. It remains to be seen. It's early days yet but you wouldn't want to comp it to the last Borderlands. So I don't think that would be an appropriate comp right now.

Fair enough. Last question, Strauss, regarding fiscal '16, you've mentioned a few times the robust pipeline, there's some momentum with digital, and you anticipate being net cash flow positive next year. Can you comment on growth prospects for next year? How confident are you that the business can grow compared to 2015?

We feel optimistic about the current state of the industry. Take-Two is in a strong position at the moment. Traditionally, this period has been favorable for the business. Several key competitors are performing well and have made positive announcements recently. The launch of new hardware has historically benefitted the interactive entertainment industry, and this time seems to be no different. In fact, it appears that there will be significant initial sales. Competitors with sound strategies, solid balance sheets, strong intellectual property, and technical capabilities are likely to thrive, and we consider ourselves among that group. We've provided more detailed insights into 2016 than in the past, but we don't have much more to share at this time. As we have marketing announcements, our labels will communicate them. However, we currently feel confident about our financial outlook for this year, and we think that 2016 is progressing well, although it is still early.

It seems interesting to me that two of the biggest games out this holiday are actually upgrades of prior games. One, of course, is yours in GTA V coming to next gen and the other is Halo, being rereleased in all of the series for at least one of the next gen consoles. And so I'm wondering is that a treatment of other games in your deep catalog that you think are appropriate to migrate up to next gen and be rereleased but upgraded. And then to the Halo thing, it's interesting in that it's repackaged the entire story into kind of one game. And is that something you might consider for GTA given the deep history of that game, not just GTA V, but all the way back the last decade or so? And then two, also on GTA, wondering if you could comment on what percentage of the people that have bought the game are still engaged with the game, either offline or online. And in the online component, what percentages of those online players are also payers?

Thank you for the question. This quarterly report shows that Grand Theft Auto Online has been a major contributor to our performance, and we are pleased with how well the title is doing, both the full game and the online aspect, and we appreciate its longevity. However, we haven't released much additional data and I don't anticipate that changing in the near future. Regarding the types of titles we produce, I understand your inquiry. Each year, we and our main competitors launch new intellectual properties as well as new versions of established properties. Occasionally, when there is a shift in platforms, we may revive an older property and update it for next-generation consoles, but we won't dismiss any possibilities. This decision is influenced by the market opportunities we identify and the potential for delivering a top-quality product, driven by the enthusiasm of our teams. It’s not something we impose on them; rather, our teams are motivated by a desire to impress consumers and follow their creative instincts, which has proven to be a successful approach for us over the past seven years. Therefore, while we do not have a set policy on this, our focus here is to ensure that consumers are excited, to provide the best titles available, and to make this the top destination for the leading creative talent in the industry.

A few questions. Strauss, when you're talking about Rockstar, some investors still think it's just GTA. So wondering if you could walk through some of the other key Rockstar franchises and comment on what they mean to Take-Two. And also, can you tell us if there's any new IP that is being developed by Rockstar, or is everything in the pipeline based on existing IP? And then coming at the GTA next-gen question a little differently, can we get a sense of what it looks like in your guidance versus the original launch? Does the guidance assume it's 10% as big, 20% as big, 30%, et cetera? And then, just finally, when you're looking at potential acquisitions, are you primarily looking to buy something very much directly related to video games? Or are you looking more broadly at media?

So Ben, let me take your first and your third, then I'm going to ask you to repeat your second after I've done that because you were speaking quickly, and I'm slow on the uptake. In terms of Rockstar, as you know, I think you know as well as anyone, other franchises include Red Dead, which has been massively successful for our Rockstar and for our company, the Midnight Club franchise, Max Payne, and numerous other titles. In terms of what Rockstar is working on in any given time, we really want our labels to make announcements and focus on the consumer and marketing, and that's something that you'd hear from Rockstar when the time is right. In terms of acquisitions, the interactive entertainment business is the only growth business in the audiovisual entertainment business. And there are areas of that business to which we currently do not have exposure, so there's plenty of opportunity out there. But we don't rule anything out, as long as it fits with the company's DNA, as long as it's high quality, and clearly would have to be digitally focused entertainment. And I'm sorry, could you repeat your second question for me?

Yes. Just relating in the guidance, are you assuming that GTA V is 10% as big as the original launch or 20% as big, or what number should we be thinking about that?

We're not giving out details on a title-by-title basis of our assumptions.

You announced that the closed alpha of Evolve, and we've seen these closed alphas more frequently now. So just kind of wondering what kind of pre-order brand lift do you generate out of these things? Or is it more about benchmarking and scaling the online multiplayer pieces or monitoring engagement? And then, at the margin, does it drive more digital purchases versus retail purchases?

Brian, it's Karl. I think it's definitely more about testing the game and gathering consumer feedback to ensure it works properly, allowing us to adjust our development efforts accordingly. There might be some minor marketing benefits, but that's not our main objective. It's primarily for development purposes. Regarding digital skew, we haven't conducted many of these tests, if any, so we lack substantial first-hand experience to determine if there will be a digital skew. You could argue that engaging people in this way may lead them to be more inclined to download digitally since that's typically how it's available. However, in the end, we don't really care how people obtain it, whether through download or disk; it makes no difference to us.

And then, maybe one quick one. You pointed to broad strength across all platforms of NBA 2K. Any comments on the traction differentiation across the platforms? Or does it kind of correspond to market share? And when you mentioned the Amazon devices, any early traction you see in there with respect to gaming? And Android NBA 2K, is that exclusively on Amazon Android, because you specifically called out available on iOS and Amazon devices?

Okay. In terms of strength across the platforms, the good news is we're having strength in NBA across all of our platforms. And in terms of weight between platforms, I don't think we're seeing anything terribly different than we've seen before. So the good news is that we feel good across all the platforms. I'm sorry, what was the other question?

It's regarding NBA 2K; you mentioned availability on iOS and Amazon devices. That's not limited to Amazon Android, correct?

Those are the only two platforms that we've announced anything or that they're on at this point. So we haven't talked about other platforms it may or may not be on.

Just to follow up a little bit. Karl, I know you don't care necessarily how the devices or the games are delivered, but can you give us a sense as to what sort of change you're seeing in terms of the digital distribution of full game downloads relative to what you've seen in prior cycles? And then, also can you guys just follow up a little bit as to what status is with some of the non-partnerships you got going on in Asia?

In terms of digital distribution, it is incredibly strong and continues to be reinforced in the PC market for us. It plays a very significant role in that market, and we are seeing growth in that area. For consoles, we are experiencing strength both digitally and physically. Regarding the increase in digital activity, there is certainly more happening at this point, but we do not anticipate rapid changes that warrant further emphasis at this time.

And in terms of China, things are going well. NBA 2K China online continues to perform well. We continue to be optimistic about Civilization coming, and we're excited.

I just have a couple of questions. One, do you have a strategy with regard to removing the convert? Are you going to force conversion at the first opportunity? And could you walk us through what that is or just let it sit there so that people who want to own equities can show that they're owning bonds?

One of our earliest converts will mature in 2016, so it doesn’t really make sense for us to take any action regarding that until then. However, we are continually assessing the situation to see if there’s a chance to make adjustments to our capital structure.

Okay. And second thing is, do you have any view on what the marketing plans are for the next gen systems from Sony and Microsoft for the fourth quarters? It's been reasonably silent. And so far, it looks like the next gens are selling quite well. But I'm just interested in any insights that you might have on what the game-box guys are actually doing to get more of these products into consumers' hands.

Larry, we agree that we are very encouraged by the sales of next-gen devices. Things are going really, really well. I know that everyone is expecting a very hot season this year. In terms of specific marketing plans, we really don't know any more than you guys do, what they publicly announced. We know that Microsoft has announced a pricing change, which should certainly benefit the installed base on that platform. But in terms of specific plans, that's something that we don't know.

I have a general question for you. In the past, we've often seen preorders as a strong indicator of a game's success. With the increase in digital activity and full game downloads, I'm curious about how you approach game development. What factors do you monitor? Is it social media conversations, or other indicators, especially for a title like Evolve? How do you consider these elements? I also have a follow-up question.

Yes. I mean, presales tend still to be a pretty good leading indicator. Awards, covers, press, social media, and the like can also be good indicators. And we do have market research to track that as do our competitors. With social media, there's a bit more insight than there used to be. And I would say, we have a pretty good sense of that. We also need to because retail is our partner, and we need to make sure that what we're willing to ship is a reflection of what we think the demand is.

I guess what I was trying to figure out is preorders are still the number one way that you are trying to figure out the potential for a game at this point?

Not really. I mean, they definitely will tell us something about launch quantities, but they don't tell us all that much about lifetime. But Metacritic ratings, for example, which you obviously don't know until after you've established your launch quantities, can tell you something about that. So I would say that preorders are important in terms of launch for many titles, not all. There are titles that have a long tail. Our Civilization titles tend to have a very long tail. In other instances, it can tell you a great deal. But you want to see how the title rates and then generally speaking, how consumers like it after it's in the market to get a sense of your lifetime sales.

Great. And then my other question is a follow-up on the full game downloads question. I know that Karl mentioned that it's not really material yet. Some of the competitors are talking about 10% to 15% of volume going through digitally. When you think about GTA V, do you think that you would be thinking about, for planning purposes, something like that? Or just wondering how you think about it?

Arvind, it's Karl. I want to clarify that I never said it wasn’t significant; what I actually meant was that we just don't focus on it. There’s a substantial difference there. Whether it’s a download or a physical copy doesn’t matter to us. You can generally assume that our numbers are in line with the industry trend, as it's a broader phenomenon rather than something unique to our company, although it could vary by title. Ultimately, it doesn’t impact us. Regarding our expectations for the percentage of digital downloads for GTA, we aren’t going to disclose that information, and it’s not something we concentrate on anyway.

We want to be wherever the consumer is. And we have said that our margins on digital distribution are a bit higher. They are for the industry as well. But in terms of margin dollars, there's a bit of a difference in our favor, but not much. But we can't control that. What we can control is making sure that we're ubiquitous, that we're wherever the consumer is. And our belief is that's our job and we can vote; the consumer votes. So that's our job to just make sure that the options are available.

You guys launched mobile games like NBA 2K15 for iOS? Do you feel like that these games are bringing new people to the franchise? Or are you primarily getting people who own the console version and just wanted an opportunity to continue to engage and play with these games when they're kind of away from the console? And then, Lainie, on the gross margins, I think that's the highest we've seen to date. Any thoughts on where kind of gross margins could go long term, especially as digital continues to ramp up and become a more important part of your revenue mix?

To answer your question about NBA mobile, it's both. There are users who engage specifically with the mobile titles, and others who interact with both the console and mobile titles as companions. Some of our mobile releases are designed to complement the console experience, but they are not mandatory for gameplay. So, the answer is both. We see a similar trend with WWE. WWE Supercard is one of our most successful mobile releases from 2K, which can be played independently but also has links to the console game. So it really is both.

In terms of the gross margin, for this quarter, we saw a bit of a higher margin based on our recurrent consumer spending being a big part of the business in the quarter. And then, for the full year, we said we're going to be mid- to upper 40s for the year, and that's also been driven by our recurrent consumer spending that's becoming a bigger part of our business this year, and we hope to see that going forward.

So Strauss, I think you've consistently said before, and correct me if I'm wrong, or putting words in your mouth, but your willingness to take some of your existing franchises global will be low cost and probably deliberate and careful. But given that you are alluding to what appears to be a traction with NBA 2K in China, and that has been in the market for some time now, has that changed your attitude or willingness to step up the risk curve a little bit and perhaps speed up the process of taking your content to the global audience?

Well, our content is already available to the global audience. We have direct distribution into the far corners of the world. And it's one of the things that we're most proud of. Our titles are available virtually everywhere. And of course, there are limitations in China, although that market may well be opening up also. As you probably know, consoles are launching there. There are still going to be significant content restraints, but we think there potentially are some opportunities. If you're referring to other forms of our franchises like NBA 2K Online and Civilization, selectively, we absolutely would like to pursue those, and we are somewhat less risk-averse than we used to be, partially based on the success we've enjoyed and partially based on the balance sheet we now have. But this remains a very, very disciplined management team. We operate in a risky business, the entertainment business. And what makes this company work is that, more often than not, we deliver a hit. We have an exceedingly high hit ratio. What makes this company work is that we have the strongest creative talents in the business, working on the best collection of owned intellectual property, delivering the highest-quality products in the business according to Metacritic for, I think, the last six years in a row. Those things are all important, and they're easy for me to talk about and really, really hard for our teams to accomplish. It's really hard to do every day, and we never ever take it for granted. We do not believe it's owed to us. And it comes based on the dedication of more than 2,500 people who work at this enterprise around the world. So easy for me to say, easy for us to brag about, really hard to do every day. And as we do more and more of that, we have the opportunity, very, very judiciously, to take on a bit more risk, build our enterprise. And that's what's helped us grow this company organically from some $700 million in net revenue just really what was a few short years ago. And we aim to grow profitably on an ongoing basis. But saying those words and doing the job are two very different things, and we're exceedingly mindful of risk, and we see ourselves as very careful stewards of our shareholders' capital, and that's not going to change.

Well, briefly, we've spoken an awful lot today. Thanks for all the questions. Thanks for your attention. And we'd like to wish you all a happy and healthy and prosperous holiday season.