Take-Two Interactive Software Inc (TTWO) — Q4 2016 Transcript

Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the fourth quarter and fiscal year 2016 ended March 31, 2016. 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 most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that, unless otherwise stated, all numbers we will be discussing today are non-GAAP. Our press release provides a reconciliation of our GAAP to non-GAAP measurements and further explanation. And on our website, we have provided additional details regarding the non-GAAP components of our cost of goods sold and operating expenses. Our press 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 fiscal 2016 marked the third consecutive year in which Take-Two delivered revenues and earnings that significantly exceeded our original outlook, driven principally by positive momentum in our core offerings. We generated record digitally delivered revenue, including our highest ever recurrent consumer spending, and our strong earnings converted into significant cash flow. We finished the fiscal year with our balance sheet in its best shape ever, including cash and short-term investments of nearly $1.3 billion. We believe our company has the best creative talent in the business. The key to our success has been their consistent ability to deliver the highest quality entertainment experiences in our industry, as reflected both in the outstanding critical reviews and strong sales that our titles enjoy. Grand Theft Auto V and Grand Theft Auto Online have exceeded our expectations in every quarter since their release and continue meaningfully to expand their audience more than 2.5 years after their initial launch. Grand Theft Auto V remains the highest rated title on PlayStation 4 and Xbox One and is the must-have experience for gamers, especially as the installed base of the new generation of consoles continues to grow. To date, Grand Theft Auto V is sold in more than 65 million units worldwide. Moreover, engagement with Grand Theft Auto Online continues to be fantastic with both fourth quarter and fiscal 2016 revenues up year-over-year. Rockstar Games has driven sustained engagement with Grand Theft Auto Online by delighting audiences with the regular release of free content updates, and they have many more on the way to keep this community thriving. Rockstar Games is, of course, also hard at work on some exciting future projects that will be revealed soon. NBA 2K16 has continued to build on our industry-leading basketball series track record of annual growth. The title's outperformed our expectations and remains poised to become our highest selling sports game ever with selling of nearly 7.5 million units, up double digits versus the same period for the prior release. NBA 2K has benefited from strong player engagement, and sales of the games' virtual currency have been the largest contributor to recurrent consumer spending next to Grand Theft Auto Online. During fiscal 2016, recurrent consumer spending on NBA 2K grew 70% year-over-year, driven both by online play and the MyNBA 2K companion app. The NBA 2K experience has become much more than traditional sport simulation game. It's a true sports RPG that incorporates deep storylines along with pop music and culture. This evolution has helped to broaden its appeal beyond sports fans, with revenue from the series increasing at an extraordinary 31% compound annual growth rate over the past 7 fiscal years. We believe that we can continue to expand NBA 2K's loyal fan base as well as drive increased engagement and recurrent consumer spending for years to come. Our annual WWE 2K series has also continued to grow, with WWE 2K16 crossing the 3 million unit selling mark during the fourth quarter. And revenue from the title has been further enhanced by the success of its downloadable add-on content, including its Season Pass. Since acquiring the license in February 2013, we've grown unit sales every year, reversing the negative trend under the former publisher. During its peak from 2007 through 2009, the WWE video game series sold 6 million to 7 million units per year. Today, the WWE brand remains as popular and vibrant as ever, and we believe we can continue to grow sales by further leveraging the development and marketing expertise of 2K and Visual Concepts, which are responsible for the tremendous success of NBA 2K. During fiscal 2016, we extended our long-term partnership with WWE, and we look forward to many more years of successful collaboration. During the fourth quarter, 2K launched XCOM 2, which was developed by the strategy experts at Firaxis Games. XCOM 2 received stellar reviews, with IGN awarding it a 9.3 out of 10, PC Gamer a 94% out of 100% and Game Informer Magazine a 9.5 out of 10. Sales of the title have exceeded our expectations and are higher than the PC version of its predecessor, XCOM: Enemy Unknown, during the same period after launch. XCOM 2 is being supported with an array of add-on content, including the Anarchy's Children and Alien Hunters packs that are available now, which should enable XCOM 2 to achieve the long-tailed success that Firaxis Games' strategy titles typically experience. During fiscal 2016, we continued to capitalize on our industry's ongoing transition towards digital distribution. We generated record digitally delivered revenue of $835.2 million, which grew 36% year-over-year and accounted for 54% of our total net revenue. Recurrent consumer spending grew 33% year-over-year to its highest level ever and accounted for 26% of our total net revenue. In addition to virtual currency for Grand Theft Auto Online and NBA 2K, recurrent consumer spending was enhanced by other offerings, including downloadable add-on content, led by Borderlands, WWE 2K, Sid Meier's Civilization and Evolve, WWE SuperCard, which has now been downloaded more than 10 million times and is our most financially successful free-to-play mobile offering, and NBA 2K Online in China, which delivered record revenues and now has over 31 million registered users. Continuing to drive increased engagement with our titles remains a key strategic priority for our organization and is one of our most important long-term growth and margin expansion opportunities. We now support virtually all of our new releases with innovative offerings designed to achieve this objective. Our results also benefited from strong growth in full game downloads, with over 20% of units for new gen consoles and over 90% of units for PC delivered digitally. In addition, it bears noting that approximately half of our catalog sales for old gen consoles are being delivered through digital download. Digital distribution is disproportionately benefiting our catalog as it gives consumers the opportunity to buy older titles that no longer receive physical shelf space. In particular, Rockstar Games has been having tremendous success with their hit PlayStation 2 titles, such as Grand Theft Auto: San Andreas and Bully, which are now available for download on the PlayStation 4 via the console's emulation technology. Rockstar Games is the top publisher in the PlayStation 2 classics on PlayStation 4 program with 3 of the 5 highest selling games. Today, we believe Take-Two is better positioned than ever for long-term success. Fiscal 2017 is poised to be another year of non-GAAP earnings in excess of $1 per share, and we currently expect to grow both revenues and earnings in fiscal 2018 based on our robust development pipeline. The wind is at our back with favorable industry trends, including our current installed base of over 60 million new gen consoles, which IDG expects to reach 115 million by 2019, and a thriving digitally delivered market for PC games. The opportunities for interactive entertainment on emerging platforms such as tablets and smartphones and in developing markets such as China and Korea are expanding rapidly, and we're actively pursuing these sectors with a highly disciplined approach. We have what we believe is the best collection of owned intellectual property in the business, and the extraordinary success of our products is breeding greater demand from consumers worldwide, which in turn creates increased opportunities for our company. These are really exciting times for both Take-Two and our industry. While interactive entertainment has been enjoyed for decades, we're just beginning to see what can be achieved by combining technological innovation with the artistic passion of our creative talent. We're committed to delivering the highest quality, most engaging entertainment experiences that captivate audiences wherever they are, and that will continue to generate returns for our shareholders over the long term. I'll now turn the call over to Karl.

Thanks, Strauss. I'd like to begin by congratulating our colleagues around the world for delivering another strong year. The hard work and dedication of our teams continue to benefit our company, providing a sound foundation for the future. I'll now discuss our recently released titles and upcoming lineup. On April 26, 2K launched the physical release of Tales from the Borderlands, the critically acclaimed, award-winning episodic adventure game from Telltale Games and Gearbox Software on PlayStation 4, PlayStation 3, Xbox One, Xbox 360 and PC. Renowned for its humor and thrilling action, Tales from the Borderlands is a terrific complement to the immensely successful Borderlands series. On May 3, 2K added a promising new brand to our industry-leading portfolio with their launch of Battleborn. We are encouraged by this title's potential, and we'll continue to expand the experience with a host of free and paid additional content offerings. 2K and Gearbox Software will be supporting Battleborn with 5 add-on content packs to be released post-launch, which players may purchase individually or together at a substantial savings through the game's Season Pass. Free content updates for Battleborn will include 5 new playable heroes, bringing the total roster to 30, as well as additional competitive multiplayer modes, maps, balance updates, and community features. In keeping with the success we've had supporting our AAA titles with free-to-play mobile games, 2K also released the Battleborn Tap companion app, which mirrors Battleborn's progression and loot system and enables players to earn new character skins that can be used in the full game. I'd like to congratulate 2K and Gearbox Software for once again delivering an entirely new, groundbreaking entertainment experience. Excitement continues to build for 2K's October 7 launch of Mafia III, currently in development at 2K's Hangar 13 studio. Mafia III is the next installment in our successful organized crime series. Set in New Bordeaux and reimagined New Orleans circa 1968, Mafia III places players in the role of gifted antihero, Lincoln Clay, a Vietnam vet determined to take revenge on the Italian mob for betraying and murdering his surrogate family. Mafia III will take the series in a bold new direction by combining its trademark cinematic storytelling with a dynamic open world. Mafia III will be present at E3, highlighted by a stylized area at our booth that is not to be missed. 2K and Hangar 13 will continue to reveal more details about this amazing new title in the coming months. Turning to our annual sports releases. 2K is hard at work on this year's versions of NBA 2K and WWE 2K. In the coming weeks, we will reveal the cover athlete for NBA 2K17, which will continue the series' proud tradition of working with the NBA's most elite athletes when the game launches in September. NBA 2K17 will also celebrate the basketball legacy of Kobe Bryant by featuring the recently retired, 18-time NBA All-Star on the cover of the NBA 2K17 Legend Edition. This special edition will highlight Bryant's career with themed memorabilia and exclusive digital content. In addition, WWE 2K17 is currently in development at Yukes and Visual Concepts, and we are confident that they will continue to innovate the series and build on its positive momentum when the game launches in October. WWE 2K17 will also be a part of the WWE SummerSlam weekend this August in New York. 2K will have more to share about these titles and their exciting new features in the coming months. Last week, 2K and Firaxis Games announced that Sid Meier's Civilization VI, the next installment in our award-winning, turn-based strategy series that has sold over 34 million units worldwide, will launch for the PC on October 21. The release of Civilization VI will mark the 25th anniversary of the series and provide the most detailed, vivid, and beautiful experience ever featured in a Civilization game. In this all-new title, active research and technology and culture will unlock new potential ways to play. Cities will physically expand across the map, and world leaders will pursue their own agendas based on their historical character traits as players race to achieve victory. We're thrilled to introduce a new installment to this beloved series, which promises to once again captivate fans with every turn. In addition to these frontline releases, we will continue to deliver an array of digitally delivered offerings designed to drive engagement and recurrent consumer spending on our recent releases and upcoming titles, including additional free content drops for Grand Theft Auto Online. Our NBA 2K16 eSports tournament on PlayStation 4 and Xbox One is quickly approaching the June 1 finals, where the 2 remaining teams will compete in Los Angeles to win a $250,000 grand prize and a trip to the NBA Finals. Throughout the tournament, more than 92,000 teams competed in over 2 million games, and the playoff and championship rounds will be broadcast on Twitch for audiences to enjoy. We're very pleased with our initial foray into the emerging world of eSports, and we will continue to explore ways to leverage our properties and to engage and reward our loyal fans. Next month, 2K will have a booth at E3, where a selection of our upcoming titles will be on display. We welcome you to stop by and see how we will continue our trend of delivering the most innovative and immersive entertainment experiences in our industry. Looking beyond the current fiscal year, we have a robust long-term development pipeline across both of our labels, which features offerings from our renowned franchises along with new intellectual properties that promises to further diversify our industry-leading portfolio.

Thanks, Karl, and good afternoon, everyone. Today, I'll review our results for the fourth quarter and fiscal year 2016 and then discuss our outlook for the first quarter in fiscal year 2017. All of the numbers I'll be providing today are non-GAAP, and all comparisons are year-over-year unless otherwise stated. Our press release provides a reconciliation of our GAAP to non-GAAP measurements. And on our website, we have provided additional details regarding the non-GAAP components for our cost of goods sold and operating expenses. Starting with our results for the fiscal fourth quarter. Net revenue was $342.5 million as compared to $427.7 million in last year's fourth quarter, which had benefited from the release of Evolve and continued sales of our more extensive holiday release slate. This result exceeded our outlook range of $260 million to $310 million due primarily to stronger than expected revenues from Grand Theft Auto V and Grand Theft Auto Online. In addition, NBA 2K16 exceeded our expectations. Digitally delivered revenue grew 12% to $226.6 million and accounted for 66% of our total net revenue. 55% of digitally delivered revenue was derived from recurrent consumer spending, which grew 15%. The largest contributors to digitally delivered revenue were Grand Theft Auto, NBA 2K, and XCOM 2. Catalog sales accounted for $211.3 million of net revenue, led by Grand Theft Auto and Borderlands. Gross margin was 46.4%. The decrease was due primarily to higher amortization of capitalized software development costs, partially offset by growth in digitally delivered revenue. Operating expenses were $109.6 million, down by $15.4 million due primarily to higher marketing expense last year for the launch of Evolve. Interest and other expenses were $0.2 million as we generated higher interest income than in last year's fourth quarter. We recorded a tax benefit of $2.5 million, which includes $5.4 million in tax benefits related to video game development costs. These benefits were higher than our forecast. In addition, our tax rate, excluding these benefits, was lower than our forecast. Non-GAAP net income was $51.7 million or $0.46 per share versus $54.3 million or $0.49 per share in the prior year's fourth quarter. This result exceeded our outlook range of $0.15 to $0.25 per share due to our strong business performance and lower tax expense. On a GAAP basis, net revenue grew 26% to $377.2 million and net income increased to $46.4 million or $0.48 per share. Turning now to our full-year results. Net revenue was $1.56 billion versus $1.67 billion in fiscal 2015, which had benefited from a more extensive release slate, including the launch of Grand Theft Auto V on PlayStation 4 and Xbox One. The largest contributors were Grand Theft Auto V and Grand Theft Auto Online, NBA 2K16, and WWE 2K16. Digitally delivered revenue grew 36% to a record $835.2 million and accounted for 54% of our total net revenue. 48% of digitally delivered revenue or 26% of total net revenue was derived from recurrent consumer spending, which grew 33%, to its highest level ever. The largest contributors to digital sales were Grand Theft Auto, NBA 2K, Borderlands and XCOM 2. Gross margin decreased modestly to 46.2% due primarily to a lower margin title mix, partially offset by growth in digitally delivered revenue. Operating expenses were $483.5 million, down by $14.8 million due to lower marketing expense, which was partially offset by increased personnel expense from a higher headcount, higher research and development expense, and increased depreciation expense. Interest and other expenses were $6.7 million. We recorded a tax expense of $13.2 million, which includes $37.6 million or $0.33 per share in tax benefits related to video game development costs. Excluding these benefits, our effective tax rate was approximately 22%. Non-GAAP net income was $218.3 million or $1.96 per share as compared to $219.2 million or $1.98 per share in fiscal 2015. On a GAAP basis, net revenue grew 31% to $1.41 billion, and net loss narrowed to $8.3 million or $0.10 per share. Turning to some key items from our balance sheet, March 31, 2016, as compared to December 31, 2015. Our cash and short-term investments balance increased to $1.27 billion. This equates to net cash of $11.12 per share, which includes a potential dilution from our convertible notes. Our accounts receivable balance decreased to $168.5 million, primarily reflecting collection of receivables. Inventory decreased to $15.9 million. Software development costs and licenses increased to $393.2 million, reflecting the development efforts around our pipeline of upcoming releases. Now I will review our financial outlook, which is provided on a non-GAAP basis. Starting with the first quarter, we expect net revenue to range from $225 million to $260 million and net loss to range from $0.40 to $0.30 per share. Revenues are expected to be lower compared with the first quarter of 2015, driven primarily by our assumptions that revenue from Grand Theft Auto V and Grand Theft Auto Online will start to moderate, partially offset by the launch of Battleborn. The largest contributors to revenue are expected to be Grand Theft Auto V and Grand Theft Auto Online, NBA 2K16, and Battleborn. We expect gross margins to expand to the upper 40s. Total operating expenses are expected to increase by approximately 32% due primarily to higher marketing expense for the launches of Battleborn and Mafia III. Selling and marketing expense is expected to be about 30% of net revenue based on the midpoint of our outlook range. We project interest and other expenses of $2 million and weighted average fully diluted shares of 86 million. Our effective tax rate is expected to be approximately 23%. Turning to the details of our full-year outlook. We expect net revenue to range from $1.5 billion to $1.6 billion and net income to range from $1 to $1.25 per share. Our revenues are expected to be roughly unchanged compared with last year, driven primarily by our assumption that our new launches and expected growth from NBA 2K and WWE 2K will be offset by moderating results from Grand Theft Auto V and Grand Theft Auto Online. Our net income is expected to be lower versus fiscal 2016 due primarily to higher expected operating expenses and substantially lower tax benefits than recorded last year. The largest contributors to revenue are expected to be NBA 2K17 and NBA 2K16, Grand Theft Auto V and Grand Theft Auto Online, Mafia III, WWE 2K17, Sid Meier's Civilization VI, and Battleborn. We expect the revenue breakdown from our labels to be roughly 75% 2K and 25% Rockstar Games. We expect our geographic revenue split to be about 60% United States and 40% international. We expect gross margins to expand to around 50%. Total operating expenses are expected to increase by approximately 27%, driven primarily by higher marketing expense for our fiscal 2017 release slate as well as our lineup for fiscal 2018, higher research and development expense, increased personnel expense from a higher headcount at the development studios, and increased depreciation expense. Selling and marketing expense is expected to be about 18% of net revenue based on the midpoint of our outlook range. We project interest and other expenses of $4 million and weighted average fully diluted shares of 117 million. Our effective tax rate is expected to be approximately 23%, which includes $60 million in tax benefits related to video game development costs. Interest on the convertible notes, net of tax, is $4.4 million, which should be added back to net income to calculate net income per share. We expect our operations to generate a modest amount of cash in fiscal 2017. In closing, the consistent execution of our strategy to deliver the highest quality interactive entertainment experiences, coupled with disciplined financial management, enabled Take-Two to deliver another year of better-than-expected revenues, profits, and cash flow. Fiscal 2017 promises to be another strong year for our company, creatively, operationally, and financially. We are well positioned to deliver growth and margin expansion over the long term.

Thanks, Karl and Lainie. On behalf of our entire management team, I'd like to thank our colleagues for delivering another strong year for our company. To our shareholders, I want to express our appreciation for your continued support. We'll now take your questions. Operator?

I was curious about how recent changes in the industry might affect Take-Two, particularly regarding the new PlayStation 4.5, a new Nintendo console, virtual reality, and eSports. Are these developments opportunities, challenges, or neutral for Take-Two?

I think in general these are all opportunities depending on how things turn out. A successful new console provides us with another chance to release titles, regardless of the source. eSports is an exciting area we discussed today, and our involvement so far through the NBA 2K tournament has been remarkable, with 92,000 teams participating. Currently, eSports primarily serves as a marketing tool for our games and enhances engagement, but we can also monetize that engagement through recurrent consumer spending, which is certainly beneficial. I've previously mentioned VR, and there's a lot of excitement in the market, as well as among our team. We are still in research and development mode because it is not yet a consumer-facing business. We want to be clear that if this becomes the platform of choice for consumers, we will actively and ambitiously bring our intellectual property to it. We tend to avoid making decisions unless necessary. Our strategy is to be present wherever consumers are, whether that's in distribution channels, platforms, product types, or geographic locations, while showcasing the best intellectual property available. In cases where we don't need to make a choice, we won't. The current environment is favorable for us as well as our competitors. We believe that the winners will be the most creative, innovative, and efficient, and that is what we strive to achieve.

Two questions for you here. On GTA Online, last year, in fiscal '16, you thought there would be some moderation. You're expecting some moderation now in fiscal '17. Are you seeing anything to suggest right now in your monthly data that there is, in fact, a slowdown going on? And then secondly, for Lainie, how are you guys treating the convert that you have coming due in December in your guidance? And what's weighing on the cash flow outlook for the year?

So in terms of GTA Online, I see it the way you do, Eric, which is, in fact, it has performed better than all of our expectations and that's certainly gratifying. And I think that's a reflection of how amazing GTA V is, how fantastic GTA Online is and how great the additional content drops have been. And we have been very pleased by the continuing results. It's more than 2.5 years after the initial release, and yet, results continue to be up quarter-over-quarter and year-over-year. So we can't quite say when results will moderate. So far, the title continues to perform very well indeed, but at some point, one's expectation would be for moderating results. Lainie?

For the convert, we are treating it as if it will be settled in stock, which is reflected in our current guidance. However, we do have the option to settle in either cash or stock. As we approach the maturity date, we will assess the best method for settling the convert and consider our cash balance at that time. Currently, we ended the year with a cash increase of $1.27 billion, giving us a strong balance. We will evaluate potential uses for that cash and decide on the best option then.

And then the free cash flow, was there anything particular that's weighing on your view that it would be modestly positive?

Yes, we're continuing to invest in the game development for our pipeline and also IT-related fixed asset expenses.

I have a couple of questions. First, I believe I know the answer, but I just want to confirm that all the guidance and figures you provided only account for the announced title date. Second, Strauss, you mentioned that you anticipate revenue and earnings growth for FY '18. Could you elaborate on what gives you the confidence to provide such guidance today? Lastly, do you have any updates on your thoughts regarding cash management and mergers and acquisitions in general?

To your first question, we've announced our entire release schedule for the year, and that will be what you can expect moving forward. Any changes to that will mainly be based on performance. Regarding your third question about cash uses, our perspective is unchanged; we see three potential uses. First, to support organic growth, which has always been our focus, and we believe there are significant opportunities for this, whether through new product types or expanding our presence in regions like Asia, which has been promising for us. Second, we aim to support new platforms and opportunities as they arise, such as eSports. There are also chances for inorganic growth that can surface unexpectedly, which is why we view cash as a strategic asset. We maintain a disciplined approach and prefer to engage in accretive deals that set us apart from some competitors, a strategy that has proven successful. Lastly, we are committed to returning cash to shareholders; over the past few years, we have repurchased about $300 million in stock and are well-positioned to continue this practice with an existing buyback authorization. Could you please repeat your second question? I believe I may have missed it.

I think you mentioned that you expected growth, I think, on both revenue and earnings for FY '18. So what gives you the confidence to say that now?

That was more a comment than a question. Or was there a question in there?

What gives you confidence?

What gives me confidence? Yes, it's what we're working on at our development studios.

We have very good visibility into our pipeline. And given what we see and also our ability to continue to grow recurrent consumer spending in the context of great new releases, it gives us high confidence in fiscal year '18 growth.

This is Tim O'Shea asking for Brian. I wanted to follow up on the outlook. Lainie mentioned the higher operating expenses in taxes for next year, but could you help us understand what might be causing the gap between top line growth and the earnings per share growth outlook for fiscal '17? Is there a game that's projected to be less profitable than expected? I also noticed the large deferred revenue outlook. How should we interpret this? I have a quick follow-up as well.

For next year, regarding the disconnect between the bottom line and the outlook, what you mentioned is accurate. We will not benefit as much from taxes, with a decrease from $0.33 per share this year to only $0.14 per share next year. Additionally, our operating expenses are projected to rise by about 29%, mainly due to increased marketing costs. Although our margins are improving, the significant difference is largely attributed to the marketing expenses and tax changes.

Okay, got it. Broadly speaking, there's been some consolidation in the industry, with the leading games in each category capturing more market share. I'm curious if you agree with this observation and, if so, how this trend towards consolidation affects your planning decisions for both your major franchises, like GTA and NBA, as well as your smaller ones that may not be category leaders.

Yes. We agree with your observation that the larger and more successful entities are gaining strength. This aligns with the dynamics of the entertainment industry, where as businesses mature, more consumer attention and revenue are directed towards the highest quality releases. In the early stages of entertainment businesses, consumers are more open to trying various brands, but as the market matures, preferences tend to concentrate on the biggest titles. This pattern has always been present in the electronic entertainment sector across all types. Our strategy has focused on producing high-quality releases and limiting the number so we can concentrate on our existing intellectual properties while also trying to launch successful new ones each year. We have successfully achieved this in most years since taking over the company, resulting in 11 titles each selling over 5 million units and around 45 titles each selling 2 million units or more, setting a standard in the industry. So, yes, the strong become stronger, and this has been evident in motion pictures, television, and music, and it will apply to interactive entertainment as well. This situation creates pressure on us and our main competitors to consistently provide high-quality titles. We view this as both an opportunity and a challenge, and certainly, for those who succeed, it's a much more favorable situation than for those who do not.

This is for Strauss, Karl, or Lainie. As you go back to this time last year, you started with guidance of $0.75 to $1. Obviously, you delivered earnings that were significantly higher than that. As you look back, would you say that most of the upside was from GTA V and GTA Online? Perhaps you could review the top 3 reasons you were able to deliver that much upside. And then my second question is specifically on Mafia III. If you could maybe provide a framework for us to be able to kind of think about the scale of this to be able to model it. Maybe talk about the marketing support, other things that you're doing, and how you're modeling it perhaps as of this point.

So in terms of our guidance from this past year, when we set our original guidance, it was our best estimate at the time when we gave out those numbers. We had a very light release schedule. And as you mentioned, some of our titles performed stronger than we had expected, GTA V and GTA Online. And that, coupled with our tax credits, is what helped us to have these fantastic results for this year.

And Arvind, regarding Mafia III, we are very excited about this title from both a creative and commercial standpoint. We believe it has the ideal mix of elements that people desire in an open world, story-driven game, offering features that many games lack. A significant investment of time and resources has been made. Our talented creative team, led by Haden Blackman, is focused on this project. We are optimistic about the potential success of this title within its genre. While we don't have a specific model to share, we expect Mafia III to surpass all of our previous efforts in this franchise, both creatively and commercially. You can use earlier Mafia titles as a reference, but we anticipate this new installment will greatly exceed the achievements of its predecessors.

You mentioned having success with some of your older Grand Theft Auto titles from the PS2 that are available on the PS4. I'm curious if there is any interest in remastering some of those older titles into HD. Do you think that would be a worthwhile use of your talent and time?

The labels will determine this in due course, and we wouldn't rule it out. The decision will primarily be economic. We won't pursue anything that doesn't look great creatively. Our starting point is whether this will delight consumers and look good. We are not primarily motivated by revenue; instead, we focus on whether it excites consumers, makes them happy, and reflects positively on our brands and company. If the answer is yes, it could be a compelling opportunity, but if the response is indifferent or negative, we would likely decline the chance to make some money. That's the perspective we use, but the labels ultimately make the decisions.

This is San in for Neil. You mentioned the release schedule is confirmed for the year, but does that include any content drops in DLC? In other words, could we possibly see content that might not currently be included? My second question is regarding NBA 2K. There has been significant growth in registered users. Could you share any additional metrics, such as active users or paying users? Is the strategy to increase the number of players who pay, or to enhance the average revenue per user? Also, could we see the potential for additional revenue streams like ad-based options for those who aren't paying?

In terms of our outlook, we have considered ongoing consumer spending and potential product releases. There may be changes and opportunities, but this is our current perspective. We've examined all aspects of our business, aware that circumstances can shift. Regarding metrics, we haven't provided extensive details on our in-game spending, though we do share broad figures on recurring consumer spending. This figure has been significant, accounting for over a quarter of our non-GAAP net revenue last fiscal year. We also noted that there are 31 million registered users of NBA 2K Online in China and discussed the usage of Grand Theft Auto Online in the fourth quarter. However, we tend to limit the metrics we share because the situation is still evolving, and we don't want to lead people to make assumptions. Even with positive results, we don’t want to imply a constant upward trend, as it is too early to determine that. Our approach, while it may sound simple, truly focuses on delighting consumers with our products. Our aim is to ensure that content releases generate excitement among consumers, leading to increased engagement, spending, revenue, and profits. As a profit-driven company, we operate in the real world with an emphasis on efficiency, organization, management, and fiscal discipline, but our main focus is on creativity. We want to make our titles and brands engaging for consumers and create an enjoyable experience that encourages spending without being intrusive. Unlike many competitors who prioritize data-driven strategies, we concentrate on creating exceptional entertainment and then seek to monetize that experience.

I'm curious, when you release new content for GTA Online, do you see a corresponding impact or sales impact for the base game, GTA V? Thinking about sort of the marketing vehicle to maybe new installs or maybe prior gen players crossing over to the current gen experience, where obviously there is new content coming out. And then, I guess, still part of that question is, I guess it's sort of nebulous thinking about the pipeline for GTA Online content, but would you sort of characterize it as about the same amount of content coming out this year or more or less? That would be helpful. And I have a quick follow-up.

Yes, it's a good question, Mike. GTA V has continued to sell well, and we've discussed its unit sales which have been impressive. However, we haven't monitored how the sales of GTA V are affected when new content is released for GTA Online, so any discussion about its impact would be speculative. That said, anything that enhances GTA Online is beneficial for GTA V. I believe it will remain a strong title moving forward and a valuable catalog title over time, as history suggests. Regarding the ongoing pipeline for online content, that’s something Rockstar will address in due course, but there is content on the way.

The last question is about Gearbox's positive comments regarding the initial sales of Battleborn, which seemed to be performing better than Borderlands. It was suggested that while it may have had a slow start, it could develop into something significant. Borderlands has sold around 8 million units to date, so I'm interested if you also feel optimistic about Battleborn's future sales potential. Additionally, I recall that Borderlands had success with digital content sales, and I'm curious about the projections for full game downloads of Battleborn.

Yes, I mean, the initial results are very encouraging, which is, I think, we can properly take away from those comments, but it is early yet. The scores are good. Consumers like it, a lot of people playing it and really loving the gameplay. But I wouldn't want you to draw the conclusion that the Battleborn curve is necessarily the Borderlands curve because we just don't have any of that information yet. So we're encouraged and we feel good about it, remains to be seen how it performs. And in terms of the ongoing digital content, we've said there is more content coming. Again, we'll leave the specifics to the label.

So as far as the fiscal '17 revenue guidance is concerned, does it assume digital growth and, more specifically, growth through recurrent consumer spending? And then separately, one of your competitors yesterday talked very bullishly about the opportunity in Asia. Maybe you can kind of reset or talk about what the company's strategy is in that market as you enter fiscal '17.

For digital, our financial outlook assumes that we're going to generate modestly lower digitally delivered revenue in fiscal 2017, like a 1% decline in the mid-single digits. This is driven by our assumption that recurrent consumer spending will be moderately lower around 10% and full game downloads will be roughly flat. For recurrent consumer spending, we expect it to be lower based on our assumption that growth in virtual currency for NBA 2K and higher revenues from downloadable add-on content for a variety of our titles will be more than offset by moderating revenues from Grand Theft Auto Online. And we expect our full game downloads to be roughly flat as last year benefited from the launch of Grand Theft Auto V for PC. But over the long term, we expect digitally delivered revenue to grow, and we continue to execute our strategy to drive greater engagement and recurrent consumer spending. As our industry transitions more towards full game downloads, we expect to grow over the long term.

Yes, this is Strauss. Our Asia strategy began several years ago with the establishment of our headquarters in Singapore, our publishing efforts in Japan, and our expansion into various other markets. We also explored new product types that we believed would be difficult to launch in Europe or the U.S. but could thrive in Asia, particularly free-to-play massive-multiplayer games. We have seen strong success with NBA 2K Online in China, which we discussed in today's call. We also launched Civilization Online in Korea and plan to introduce it in several other Asian markets. We are working on many other exciting opportunities in the region. This business has grown substantially from a minor segment to a significant portion of our operations, and Asia represents a particularly vibrant market where consumer preferences for games differ markedly from those in the U.S. or Europe, with a strong emphasis on massive-multiplayer games and the free-to-play model. We understand that not all business models are applicable in every market; hence, we must adapt our offerings to meet the specific needs and desires of consumers in those regions. We are extremely enthusiastic about Asia and believe the industry has only begun to tap into the potential of China. I hold the view that the Chinese government is coming to realize that easing restrictions on Western products can be advantageous and aligns with consumer desires, which will not negatively impact perceptions of Chinese society. I anticipate that these restrictions may loosen in the coming years, though perhaps not within the next 12 months. This would be excellent news for us, especially considering that the middle class in China is larger than all U.S. households combined. We see tremendous potential in this market and are prepared to seize these opportunities. We always comply with governmental regulations globally, and China is no exception. I firmly believe it's time for restrictions to ease, which would benefit Chinese society as they perceive it. This could create significant opportunities for us that are not yet reflected in our current or future financial outlooks.

Thank you for being with us today. We are very satisfied with our results and optimistic about our future. However, what truly makes us proud is our nearly 3,000 colleagues worldwide who are dedicated every day to creating the best interactive entertainment experiences, bringing them to market, and running a responsible business to ensure that consumers enjoy our products. We feel very fortunate to work in an industry that we are so passionate about. We appreciate our colleagues and are pleased with our outcomes. Thank you for joining us.