Take-Two Interactive Software, Inc. (TTWO) Q1 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to Take-Two Interactive's First Quarter Fiscal Year 2014 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications for Take-Two Interactive. Thank you, Mr. Diamond, you may now begin.

Good afternoon. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the first quarter of fiscal year 2014 ended June 30, 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 31, 2013 and the company's registration statement on Form S-3 dated June 12, 2013. These documents may be obtained from our website at www.take2games.com.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, which is posted at www.take2games.com for a GAAP to non-GAAP reconciliation and further explanation. And now, I'll turn the call over to Strauss.

Thanks, Hank. Good afternoon, and thanks for joining us today. During our fiscal first quarter, we continued to benefit from robust demand for our recent releases, Evergreen catalog titles and expanding portfolio of unique digitally delivered offerings. This enabled our company to deliver results that exceeded our outlook, marking the fourth consecutive quarter in which we've outperformed expectations. These results confirm that the market for the highest-quality current generation titles remain strong even as anticipation builds for upcoming launches of next-generation consoles later this year. Accordingly, we've increased our revenue and earnings outlook for fiscal year 2014.Turning to the key drivers of our first quarter results, the enduring popularity of Borderlands 2 has enabled the title to sell in nearly 7 million units and remains on track to become the highest selling release in the history of 2K. During the first quarter, we launched 3 critically acclaimed and highly successful downloadable add-on packs for the title, including the Ultimate Vault Hunter Upgrade Pack, Psycho Pack and Tiny Tina's Assault on Dragon Keep. Add-on content for Borderlands 2, including its season pass, was the single-largest contributor to our first quarter results. Our add-on content provides incremental revenue and profits, while also helping to deepen the engagement of existing fans and attract new ones. NBA 2K13 continues to grow its audience around the world and contribute significantly to our results. The title is now both the highest-selling and most-profitable sports release in the history of 2K, with more than 6 million units sold in worldwide. In addition to being the industry standard bearer, the success of NBA 2K13 has been enhanced by record digital sales for the franchise, including virtual goods, while our NBA 2K Everywhere offerings bring the brand to every screen where consumers want to experience the very best in basketball. BioShock Infinite is North America's best-selling multiplatform release so far this year, according to NPD. The title has crossed the 4 million unit selling mark, and we expect it to become the top-selling release in the BioShock franchise. It's being supported with downloadable add-on content, which Karl will discuss shortly. We had no tentpole releases during the first quarter, and therefore our industry-leading catalog was particularly integral to our results. In addition to Borderlands, catalog sales were led by Rockstar Games' iconic Grand Theft Auto franchise and Red Dead Redemption, which continue to attract new fans years after launch. Our strong catalog remains an important competitive advantage and provides a relatively stable and predictable profit stream to complement our new release schedule. Revenue from digitally delivered content grew 128% in the first quarter and accounted for a record 52% of our total non-GAAP net revenue. The primary drivers were add-on content and full-game downloads of new and existing catalog titles. We also benefited from in-game purchases of virtual goods and our growing portfolio of mobile offerings. On June 20, we released XCOM: Enemy Unknown for iOS, which is our first mobile version of a current-generation nonsports AAA title and also our first mobile offering to carry a $20 price point. The game received an outstanding 92 average score on Metacritic, and it was among the top 10 grossing apps on iPad within the first week of its release. The success of XCOM: Enemy Unknown for iOS illustrates that consumers are willing to pay a premium price for premium entertainment experience on any platform. This bodes well for the opportunity to deliver profitably our most immersive new AAA titles to mobile platforms as they evolve. Recently, we further strengthened our already solid balance sheet through the completion of a $287.5 million offering of 1% convertible senior notes due 2018. This enabled our company to refinance its 4.357% -- 4.375% convertible senior notes due 2014 on substantially improved terms while also increasing our cash. We're highly optimistic about our potential for growth over the long term. This additional capital gives us even greater flexibility to take advantage of opportunities that we may see in the marketplace for studio or intellectual property acquisitions, strategic investments, share repurchases and other initiatives to expand our business and create shareholder value. We're pleased with our start to the fiscal year, which promises to be one of Take-Two's best ever, led by the eagerly anticipated launch of Rockstar Games' Grand Theft Auto V on September 17 and the fall releases of NBA 2K14 and WWE 2K14. Looking ahead, we are well positioned to capitalize on the opportunities presented by the upcoming launches of next-generation consoles. We have an extensive development pipeline, highlighted by proven franchises in groundbreaking new intellectual property. As a result, we expect to deliver non-GAAP profits this year and fiscal 2015 and for the foreseeable future. I will now turn the call over to Karl.

Thanks, Strauss. Today I'll give an update on the recent releases and development pipeline. Earlier this month, 2K successfully launched Sid Meier's Civilization V: Brave New World, a massive expansion pack for Firaxis Games' award-winning strategy title, providing new depth and replayability through the introduction of international trade and a focus on culture and diplomacy. The pack has been applauded by consumers and critics. According to IGN, who gave the game 9.4 out of 10, Brave New World is the best Civilization expansion so far. And Game Informer, who scored it 9.25 out of 10, said this second expansion cements Civilization as the marquee strategy title in all of gaming. Congratulations to the team at 2K and Firaxis for continuing to take this fantastic franchise to new levels. Turning to our online projects in Asia. NBA 2K Online, developed in partnership with Tencent, was launched commercially in China last October and continues to make positive strides. Usage and player engagement are gaining momentum. And according to QQ Games, it remains among the top 10 most played PC games at Internet cafés in China. We are actively exploring, bringing our renowned NBA 2K brand to more markets and platforms around the world. Pro Baseball 2K, developed in partnership with Nexon Corporation, launched commercially in Korea in May. The game offers an authentic Korean pro baseball simulation experience based on the MLB 2K engine and will incorporate significant new content features throughout the balance of the year. And Civilization online, 2K's massively multiplayer online game, continues in development with XLGAMES games in Korea and our Firaxis Games studio. The project is being led by renowned industry veteran, Jake Song, and is one of the most exciting and ambitious online game development initiatives in the region. We continue to believe that our online projects have the potential to complement our core business with a relatively stable, higher-margin revenue stream over time. Looking ahead to our announced pipeline of releases. 2K Marin is gearing up for the August 20 launch of The Bureau: XCOM Declassified. Set in 1952 at the height of the Cold War, the third-person tactical shooter tells the story of the founding of the top-secret XCOM organization. In keeping with the spirit of the XCOM franchise, The Bureau fully embraces the challenges of permanent death and its calculated combat design requires players to think and act tactically. We're confident that 2K Marin's narrative-driven vision for this title will challenge players unlike any other third-person shooter [ph] and the team at Irrational Games have been hard at work on add-on content for the critically acclaimed BioShock Infinite, and today marks the release of the first downloadable content pack, BioShock Infinite: Clash in the Clouds. This pack presents players with a series of unique and intense challenges, as well as many new combat opportunities set in 4 new areas inspired by the classic BioShock Infinite environment. Also announced today is BioShock Infinite: Burial at Sea, which is a 2-part add-on campaign, featuring an all-new story for Booker and Elizabeth set in the underwater city of Rapture before its fall. All 3 packs were included as part of the BioShock Infinite Season Pass, and can also be purchased individually. As Strauss mentioned earlier, Borderlands 2 continues to attract new audiences and solidifies the series as one of our company's most important franchises. Given the overwhelming success of the title's downloadable add-on content, 2K and Gearbox Software have announced plans to release even more offerings. This fall, 2K will launch the Ultimate Vault Hunter Upgrade Pack 2, Digistruct Peak Challenge, which will raise the level cap for all 6 playable characters. In addition, for the first time, new uniquely themed boss fights with additional bonus content will be available for individual purchase and continue into 2014. On September 17, the next installment in the Grand Theft Auto series will release from Rockstar Games. Grand Theft Auto V will be the biggest, most dynamic and most diverse open-world game the label has ever created. Focused around the series of major heists, Grand Theft Auto V blends storytelling and great game play [ph] in new ways by allowing players to drop in and out of their lives of the game's 3 lead characters to experience all sides of an inter-world story. With a strong preorder campaign, the title is lining up to be both the biggest launch in the history of the franchise and Take-Two. Grand Theft Auto V promises to be this year's must-have entertainment experience. On October 1, 2K and Visual Concepts are poised to once again redefine the basketball genre of interactive entertainment with the release of NBA 2K14. We're thrilled that 2013 NBA MVP LeBron James will make his video game cover debut on the title. As one of the greatest athletes of this generation, James will lead 2K's groundbreaking NBA 2K franchise into the future of sports video games, with 2 dynamic and unique experiences for current and next-generation consoles. NBA 2K set the benchmark for sports gaming on the current generation of consoles, and NBA 2K14 will continue that legacy on next-generation consoles as the company's first offering for the PlayStation 4 and Xbox One. On October 29, gamers will step into the squared circle with some of the biggest names in sports entertainment, with 2K's launch of WWE 2K14. Developed by Yukes for the Xbox 360 and PlayStation 3, WWE 2K14 will be the most electrifying, authentic and comprehensive WWE video game experience to date. Not only will the title feature WWE Superstar Dwayne "The Rock" Johnson on its cover, but 2K recently announced a special preorder campaign that will include the franchise debut of the legendary Ultimate Warrior. We're confident that the addition of the pop-culture phenomenon will attract both old and new members of the WWE universe, and we'll finally be able to create dream matches with today's top superstars. As Take-Two heads into the next generation of gaming, we do so in the strongest position in the history of our organization. We firmly believe that we have the best portfolio of owned intellectual property in the business. Our world-class creative teams raised the bar for innovation and excellence in the current console jet cycle, and as we enter the next cycle, we will leverage every facet of our new technology both to expand our leading franchises and to create new intellectual property that will once again change the way we experience and think about interactive entertainment. In support of these creative endeavors, we will capitalize on new business models, pursue new platforms and expand geographically to capture an even larger global audience. In closing, I'd like to join Strauss in thanking all of our employees for their dedication and hard work. This year is poised to be one of our best, and we remain highly optimistic about our long-term outlook. Thanks, and I'd now like to turn the call over to Lainie.

Thanks, Karl, and good afternoon, everyone. I'll review our results for the fiscal first quarter and then discuss our updated outlook for fiscal year 2014 and our initial outlook for this fiscal second quarter. All of the numbers I'll be providing today are non-GAAP results from continuing operations and all comparisons are year-over-year unless otherwise stated. Our press release provides reconciliation of our GAAP to non-GAAP measurements. Starting with our results for the fiscal first quarter, net revenue decreased 36% to $144.3 million, as last year's first quarter benefited from the releases of Max Payne 3 and Spec Ops: The Line, and we had no significant releases during this year's first quarter. This exceeded our outlook range of $100 million to $125 million due to strong sales of digitally delivered offerings, particularly add-on content for Borderlands 2. Catalog sales accounted for 60% of net revenue, led by the Borderlands franchise, the Grand Theft Auto franchise and Red Dead Redemption. Revenue from digitally delivered content grew 128% year-over-year and accounted for a record 52% of net revenue. The largest contributor to offerings are Borderlands 2, the Grand Theft Auto franchise, NBA 2K13 and BioShock Infinite. Gross margin increased 15.8 percentage points to 35.4% due primarily to lower development royalties and a higher mix of digital revenue during the quarter. Gross margin was lower than expected, as we recognized the $29 million impairment of capitalized software development cost during the quarter related to a 2K title in development. Operating expenses were approximately $94 million, down by about $45 million due primarily to lower marketing expenses, as we had no new major releases during the quarter. In addition, G&A was lower due to the absence of the $15 million onetime contractual obligation that was recorded in the first quarter last year. Interest and other expense was $4 million, and non-GAAP net loss was $47.1 million or $0.54 per share as compared to a net loss of $98.8 million or $1.16 per share in fiscal first quarter 2013. On a GAAP basis, we reported a net loss from continuing operations of $61.9 million or $0.71 per share. Both GAAP and non-GAAP net loss include the impairment of capitalized software development cost of $29.6 million or $0.34 per share for GAAP, and $29 million or $0.33 per share for non-GAAP. Our non-GAAP net loss of $0.54 per share exceeded our outlook range of a loss of $0.55 to $0.70 per share, primarily due to a stronger-than-expected digital sales, partially offset by the impairment of capitalized software development cost. Turning to some key items from our balance sheet of June 30, 2013 as compared to March 31, 2013, our cash balance increased to $646.3 million. Our accounts receivable balance decreased to $35.2 million, primarily reflecting collections on receivables associated with the release of BioShock Infinite near the end of the fourth quarter. Inventory decreased to $27.9 million, and software development cost and licenses remained relatively flat at $293.6 million, reflecting the development efforts around our pipeline of upcoming releases, offset by the impairment of capitalized software recorded during the quarter. As mentioned by Strauss, we recently completed an offering of $287.5 million of 1% convertible notes due 2018. At the same time, we issued a notice calling all of our outstanding 4.375% convertible notes due 2014 for redemption on August 29, 2013. It's important to raise money when market conditions are receptive, and this is a very rare and possibly short-lived window of opportunity to take advantage of very attractive terms. Essentially, we are refinancing the old converts, which has a coupon of 4.375% and effective strike price of $14.95 of maturity for the new convert, with a much lower coupon of 1% and a much higher strike price of $21.52. At the same time, we've added additional cash to support our long-term growth initiatives, refinance other indebtedness and/or execute on our share repurchase authorization. From an income statement perspective, we expect to reduce our annual non-GAAP interest expense by approximately $3.5 million and modestly increase our fully diluted share count once the redemption is completed in August. Now I will review our financial outlook for the full year and second quarter fiscal 2014, which is all provided on a non-GAAP basis. We are revising our financial outlook for fiscal 2014 to reflect a strong first quarter result and outlook for the remainder of the year. We now expect non-GAAP net revenue to range from $1.775 billion to $1.875 billion, and non-GAAP net income to range from $2.25 per share to $2.50 per share. Turning to the details of our full year outlook, our expected revenue range is since the on-time release of the titles we have planned for launch during fiscal 2014. We expect the revenue breakdown from our labels to be roughly 65% from Rockstar and 35% from 2K. We expect our geographic revenue split to be about 50% United States and 50% international. We expect gross margins in the low 40s. Total operating expenses are expected to decrease by approximately 4%, primarily due to lower sales and marketing expense. Selling and marketing expense is expected to be about 13% of net revenue based on the mid-point of our outlook range. And we project interest and other expense of approximately $12 million, tax expense of about $9 million and weighted average fully diluted shares of approximately $127 million. This reflects weighted average basic share of approximately 90 million, which includes an estimated 1.5 million shares to be issued to settle our 4.375% convertible notes, 10.5 million participating shares for our unvested stock-based compensation awards, and 26.5 million shares representing the potential dilution from our convertible notes under the "if-converted" method of accounting. Turning to the outlook for the second quarter fiscal 2014, we expect non-GAAP net revenue to range from $750 million to $800 million and non-GAAP net income to range from $1.20 to $1.35 per share. The majority of our revenue in the second quarter is expected to come from Grand Theft Auto V. We expect second quarter gross margins in the low 40. Total operating expenses are expected to increase by approximately 44% from the prior year second quarter, driven primarily by higher sales and marketing expenses. Selling and marketing expense is expected to be about 14% of net revenue based on the mid-point of our outlook range. Our second quarter outlook also reflects interest and other expense of approximately $3.5 million, tax expense of about $4 million and weighted average fully diluted shares of approximately 124 million. This reflects weighted average basic shares of approximately 87.5 million, which includes an estimated 1 million shares issued to settle our 4.375% convertible note, 10 million participating shares for our unvested stock-based compensation awards, and 26.5 million shares representing the potential dilution from our convertible notes under the "if-converted" method of accounting. In closing, our better-than-expected start to fiscal 2014 continues the positive momentum of our business and ushers in what we believe will be a terrific year for Take-Two. With numerous opportunities for growth and further diversification on the horizon, our organization has an incredibly strong balance sheet and the fiscal discipline to efficiently drive long-term shareholder value. I'd also like to thank our employees for their continued hard work and dedication in helping Take-Two achieve its goals today, and building an even stronger company for tomorrow. Thank you. Now I'll turn the call back to Strauss.

Thanks, Karl and Lainie. On behalf of the entire management team, I'd like to thank our colleagues for their effort in delivering a solid start to what we believe will be a fantastic year for the company. To our shareholders, I want to express our appreciation for your continued interest and support. We'll now take your questions. Operator?

[Operator Instructions] Our first question comes from the line of Justin Post with Merrill Lynch.

I guess just 2 questions. You're raising revenues, it's still very early in the year, just what gives you most confidence that you can achieve the higher revenue forecast for the year? What's kind of going right, right now? And then secondly, any thoughts on potentially keeping the share count in check now that you've kind of done all the convertible activity? And are there ways the company can actually start thinking about reducing the share count?

Thanks, Justin. We're increasing the financial outlook based on our better-than-expected results for the first quarter and our strong release schedule for the remainder of the year, including obviously Grand Theft Auto V, our NBA title, our WWE title and our catalog titles and the rest of our release schedule, so it's looking very sound. In terms of our share count, remember our share count is driven by cap accounting, that means we have to include things like unvested options. It also varies depending on whether we're in a profit or a loss quarter. It also varies with regard to the accounting for our converts. And the answer is based on this most recent financing, our share count really hasn't changed very much at all, and we feel the small change is actually swamped by the reduction in the interest cost and the benefit of the incremental capital in our balance sheet. In terms of other steps to reduce the share count, I think the real question is, what steps are we taking to increase value per share and the value of the company overall? And those steps, we outlined them some years ago and we've been trying to execute against. Primarily, what we've tried to do is diversify the product offerings of the company, be a market leader in terms of the quality of our intellectual property and the quality of our individual leases for those franchises. Every year since 2007, we've released a multimillion unit, new intellectual property, we'd like to keep doing that. We've expanded our offerings around the world. We've gotten into mobile business and other businesses, including the MMO business in Asia. And we've really been a leader in innovating for product offerings, whether that's in-game payments or free-to-play games in Asia with partners. We need to keep doing more of that. The fact is, today, we reported over $600 million of cash on our balance sheet and an outlook of -- for making $2.25 to $2.50 a share in non-GAAP earnings. And we've also said, importantly, that we expect the following fiscal year to be profitable and to be profitable for the foreseeable future. If we're able to achieve that and we have a good deal of confidence that we can, then the value of the company and of all those shares will -- should increase. And that's certainly our hope and expectations.

Great. Maybe a follow-up on the first point. Are you seeing a little bit better preorder activity than you saw maybe a couple of months ago? Or are you seeing just more demand from retailers for some of your big releases? Any update on how you're looking at the slate right now?

We don't talk about specific preorders, but I will tell you that the outlook is great and the feedback directly from retail is terrific. And obviously, the release that this whole company is focused on worldwide is Grand Theft Auto V. And we're very proud of the fact that we are one company, even though we have a relatively far-flung group of employees in multiple locations all over the world. We all pull together to get behind all of our tentpole releases. And retail's our most important partner, it still represents the bulk of our revenues. Feedback, including the feedback driven by preorders, has been nothing short of extraordinary. However, we don't discuss the specific numbers.

Our next question comes from the line of Arvind Bhatia with Sterne Agee.

I know you don't want to get into any kind of numbers on GTA V, but I thought maybe we could talk about GTA IV and if you could just remind us what that title in its first year and life to date, as you continue to see success of that product. And then also in terms of the digital strategy for GTA V, obviously huge opportunity there. You're doing some of that right at the start. It will be helpful to maybe understand how frequently you'll be introducing additional digital content.

Yes. We've -- for Grand Theft Auto IV, we've sold in about 25 million units inception to date. I don't have the first-year numbers at the tip of my tongue. Although, I guess, the answer is that -- Hank does. So we sold through about 8.5 million units the first month, that's about 11 million units within the first month of launch in 2008, just putting in context. But the more important point is that we've sold in 25 million units of GTA IV inception to date and still selling now, this many years later, and the entire franchise has sold in about 125 million units, over 125 million units. So -- and it's also worth noting that the install base today of the platforms for which we're releasing is roughly triple it was when we launched GTA IV. That isn't to say that we'll see a straight line to results, but this massive install base at the time when we think consumers are hungry for Grand Theft Auto V is very good news indeed. In terms of digital content, we're going to let Rockstar Games talk about digital plans for the title. That's the appropriate place for us to talk about to what we're doing for the product and what we're doing for marketing. But suffice it to say that we've been a leader in digital add-on content in the quarter that we just released. Our biggest contributor revenue was downloadable add-on content for Borderlands 2, and we think we really do have a point of view about how best to delight consumers not just at the time of the initial release, but also on an ongoing basis. And what we've learned is that downloadable content does not work for every title in the market, it doesn't even work for all of our titles. It works when we put out something really great and then we put out more stuff that people really, really like. And once again, it comes back to delighting consumers. That is Rockstar Games' specialty. That is what Grand Theft Auto V is all about, a delightful consumer experience that we think is going to amaze everyone who plays it. And you'll stay tuned, but we feel really good about it.

Our next question comes from the line of Mike Olson with Piper Jaffray.

You mentioned just now a BBB install base today versus when GTA IV shipped, and is there anything you can say about kind of what your expectations are for GTA V attach rates in the current environment and with the much larger addressable market? And maybe if not specifics on attach rate, just kind of maybe how you're thinking about why attach rates could be different from -- when GTA IV shipped?

Well, we're at a different point in the console cycle, Mike, and there's no doubt that attach rates are lower at the tail end of the console cycle, in general. Because if they weren't, then I'd be telling you that we're going to -- I mean, I guess, I'd extrapolate and so that we expect we'd sell 75 million units of GTA V, which will be lovely, but we're not saying that today and are -- obviously, our financial outlook does not reflect that number. Why do attach rates decline? Because this is a sine-curve business. And when people get new hardware, they overconsume as they get used to having a hardware they underconsume. It's always been the nature of the business for nearly 30 years, and I don't really expect it to change. That said, we're putting out an extraordinary experience, and we do think that avid players and even casual players who own these consoles and some who currently who don't own the consoles will own this title, and we'll be there to serve and meet their needs.

All right. And then can you just talk about the new day and date release features of the next-gen consoles? Is that something that you guys are excited about or more neutral on? And I guess could you share what percent of your front-line titles tend to be downloaded directly today? I'm assuming it's near 0%.

Oh no, it's not near 0. We definitely have full-game digital downloads, and they're meaningful to us. And obviously, we'll let the console companies talk about their own policies. They set them and we adhere to them, because they're our partners and that's the business that they're in. But our own view is that meeting consumers where they are is the best way to run the business. And then you want to make sure that your policies reflect the way people like to consume product. We've always been ecumenical about platforms, channels, geographies and business models. We are not a rule-based company. Our goal is to delight consumers. And the way we do that this by being flexible, bringing them the best products wherever they are on whatever platform they want to consume it. So we are -- we try to be good partners with the console makers, they are our bread and butter. We support them as they do us. We recognize that they set these policies, and we encourage the policies to be as open-minded as possible. But you can rest assure that we will always be, in our view, a leader in being flexible and consumer-friendly within the purview of the policies that the console makers set.

Our next question comes from the line of Eric Handler with MKM Partners.

Two digital items for you. One, can you give us a sense of how much of your digital business was mobile? And then secondly, maybe you could give us a sense, for the digital business, how much came from Asia?

We don't really break it out, but we did say that the biggest drivers were full-game downloads and downloadable content. But apart from that, we don't break it out with more specificity.

Our next question comes from the line of Daniel Ernst with Hudson Square Research.

Two questions, if I might. First, on the console cycle. Can you talk about what your expectations are for the size of the install base cycle-on-cycle and what your expectations are for the initial sell in? I think there's some expectations that the console makers will not repeat past mistakes. And how supply -- if you have any view on that within the industry and whether the early part of the console cycle could be bigger than the early part of the last one, and whether this new console cycle could be as large or be smaller than the last one? And then on digital, your commentary around the relative success that you had with a $20 tablet game. I wonder if you could opine to the future, Strauss, as to when we think we could have a tablet game that is as immersive as a console game, and what that point you'd be able to support console-type prices? Can you get the $60 game when you deliver a game that's as immersive on a tablet as it is on a console or PC?

Yes. I mean, the second question first. The console -- the tablets still aren't powerful enough to run our console titles in their full experiences and the way they want. But that we think that's just a moment in time. We think that if you believe in Moore's Law, and we do, it's a matter of just a couple of years before tablet will be a terrific entertainment platform. It already is a great entertainment platform for watching a TV show or watching a movie. We do need an outboard controller that becomes sort of an industry standard that works for consumers. But I have every reason to believe that a tablet will be a great game platform, and we'll be right there. I do think we're a couple of years away. To your point about pricing, we don't tend to spend a lot of time talking about pricing. The truth is that consumers pay for what's of value to them. And obviously, we create a product that's very expensive to make in market, and its price point reflects the intersection of those 2 things. If -- there really is no reason why if you deliver great experience on tablet, we should be price limited. But if we were, we'd have to figure out a different business model, and we're pretty flexible people and we -- I'm sure we'd be able to do that. So we'll listen to consumers and we'll give them what they want. And obviously, the experience that we currently deliver to consoles has a certain price, and it also has a certain cost. And if consumers push back on the individual bite size of a price because it's on a tablet, that wouldn't make very much sense. But if that happened, we could work within those parameters as well by altering and tailoring our product offering. In terms of the console cycle, we're quite optimistic. We don't share our projections or expectations, and we've only announced one title so far, which is the NBA title for next-gen. So we really haven't talked a whole lot about it but, yes, we are pretty optimistic and we're going to leave projections to the analysts.

Our next question comes from the line of Ben Schachter with Macquarie.

A couple of questions on GTA and then one for Lainie. Strauss, can you talk about the marketing plan, how it's going to differ versus what was for GTA IV? Any changes notably between international and domestic? And then also, I know you can't talk about the digital content plans, you'll have Rockstar do that, but can you just talk about from a pure financial point of view, what does the ARPU look like? Or what is the lifetime value of a GTA V consumer look like versus a GTA IV consumer? And then Lainie, could you just let us know what you think the net cash will be by the end of the fiscal year?

Ben, it's Karl. In terms of GTA marketing, again, this is really something that Rockstar is better first to talk about than we are. But look, we have a lot more of arcane tools at our at disposal than we did back when GTA IV launched. I mean, online is a much bigger component of most marketing budgets, not just ours, but across the industry. There's also other outlets there's -- that we use. I mean, we're very heavy in retail, preorders are a big part of our marketing strategy. So there are some differences. But rest assured, the Rockstar folks have put together an incredibly comprehensive marketing program that ties in all of our marketing partners, including third-party media sources and retail as well. In terms of the digital content plays, that is something that we're just -- we're ultimately impressing [ph] lifetime value of consumers, et cetera, that's something that we just don't discuss.

And for the cash at the end of the year, we don't provide cash flow projections, but we are going to be cash flow positive for the remainder of this fiscal year.

Our next question comes from the line of Doug Creutz with Cowen & Company.

It looks like you beat your OpEx guidance in the quarter by about $10 million. You lowered your full year OpEx guidance by about $30 million, and I was wondering if you could kind of talk about what's going on there? And then separately, the game that you took the write-down on, is that a game that was canceled or one that remains in development?

So for the OpEx, specifically to this quarter, the beat over last quarter was due to the onetime write-off that we -- or the onetime contractual obligation that we had last year. And then for the full year, it's just an overall mix of where we're seeing the business, in bottoms up, we forecasting for the remainder of the year.

Yes. And in terms of the write-down for software cost, capitalized software cost, we're not providing more clarity on that.

Our next question comes from the line of Edward Williams from BMO Capital Markets.

This is San Phan for Edward Williams. Just 2 questions. One, can you tell us a bit more about what your plans for the growing cash balance is, particularly after 2K is released? And then 2, if you can share any thoughts on how you're allocating development dollars across legacy consoles or current chain consoles versus next-gen?

I'll take the first part of the question on the cash balance. We did mention that we don't provide cash flow projections, but we plan to be cash flow positive for the remainder of the year.

In terms of allocating dev across current-gen, next-gen, we're obviously not going to tell you that specifically. But we can tell you that we're supporting both next-gen and current-gen consoles significantly.

[Operator Instructions] Our next question comes from the line of Mike Hickey with The Benchmark Company.

Just curious, Strauss, on kind of your philosophy if some of your bigger games over next-gen platforms, if you expect any sort of change into how you kind of pace the orations [ph]. I know, historically, you've always kind of left it up to your developers, but with new tech and maybe some more new synergy in terms of less difficulty in terms of competing platforms, you can keep it up at air, at least differently?

Look, it's possible that we are going to find that developing for this next-gen will be more efficient. It's possible to find that it's easier to develop for multiple platforms simultaneously, it remains to be seen. The bulk of our timing of releases though has been driven by making sure that we put out really great titles and making sure that we don't overwhelm audiences and burn out our franchises. Our goal is to try to create permanent franchises, that's the unique goal in the industry. Our competitors do not see it that way. Our competitors' view is that our franchise will have a certain life, and at the end of that life, you move onto the next thing, so you better make hay while the sun shines. Our view is to the contrary. The best franchises are permanent franchises. Outside of our business you can look at James Bond, for example. And it's been our goal not just to preserve and grow the Grand Theft Auto franchise, but also to build other franchises that we think can be permanent, whether that's the Red Dead franchise or the Borderlands franchise or the BioShock franchise or others, Civilization, for example. So I don't -- I think in certain instances, we'd like to see releases paced a little more closely together. I don't really think next-gen is going to change the production approach sufficiently that, that will be the difference that makes the difference.

And I was just curious on your kind of view on your competitive profile. Obviously, at E3 this year, there seems to be a lot more representation within the open-world experiences. And of course, we're on the front end here of an emerging console cycle where there can be a big share shift. So just curious how you see the competition.

We have a healthy respect for our competition. We don't take anything for granted. We're fond of saying that we think arrogance is the enemy of continued success. We're always looking over our shoulders and not because we are worried about someone eating our lunch, but because we're worried about making sure that we always provide the best experience to consumers, that we're always known as the standard bearer for what is the very best in interactive entertainment. And to do that, we have to be mindful of what our competitors are doing and what our consumers want, and always give them what they want and then some and to do so at a fair price. So we have the highest weighted average Metacritic ratings in the business, and yet we know we can always do more. Our basketball title, for example, is the highest-rated sports title in the business. It has been for 12 years the #1 basketball title, and yet we still want to do more. We're very self-critical, we're always trying to push the envelope. So are we worried about our competition? Yes. But what are we focused on? We focus on our own knitting, making sure that we do is the very best.

Our next question comes from the line of Brian Fitzgerald with Jefferies.

Catalog was a key driver for the quarter at 60% of the net rev, and digital is also growing nicely up 130%-ish. How much of the digital is catalog? Have you broken by that, or how do you think about that? Or is it more shift around based on the release lineup? And then maybe one follow-on after that.

Brian, we don't break it out specifically, but we did say that Borderlands 2 downloadable add-on packs was a big driver in the quarter. So it isn't all just catalog. It's good that our catalog is doing so well, it's also good that digital is doing well. It's a mixture of both. You had another question?

Yes, another quick one. So free-to-play, how do you think free-to-play is driving digital also? Are the conversions trending better or how do you think about that in terms of driving your digital side?

We don't -- our free-to-play business is largely limited to Asia, and that business is developing nicely, as Karl mentioned. We expect it to be a meaningful contributor going forward, but it's already turning into a profit contributor, which is also nice. That business has really unfolded exactly as expected. We mitigated our risk and the risk didn't materialize, and we're being unique to see the reward. But outside of Asia, we basically have business for which people pay for, and that's through pretty much across the board for us. We're open-minded about business models. Free-to-play is a business model, in the states, has been pretty checkered. If you take a look at how some of our competitors have done that have tried to play in that space, there was a brief moment in the sun and that moment has clearly passed. We were highly skeptical that, that business, had been said so publicly. And in any case, it was not an area which we had great expertise. So we continue to play in the mobile space, the bulk of those games are sold. And we continue to be open-minded about business models as they develop.

Our next question comes from the line of Colin Sebastian with Robert W. Baird & Co.

Just a couple of follow-ups, I think. On NBA 2K14, wondering if there will be any shipments included in the September quarter? And related to that, can you talk about your expectations for that franchise or that title relative to last year's version? And then secondly, does the pending investment in Activision from Tencent have any impact in your relationship there?

I'll take the Activision piece first. I think there's been any affect at all in our relationship with Tencent based on their investment in Activision. So that's a pretty easy one. In terms of NBA 2K14, can you repeat that question again? I think I missed it.

Sure. Will there be any shipments of that title included in the September quarter? And then also, your expectations for the game relative to last year's version?

Okay. In terms of September quarter, there wouldn't be, because the game isn't released in September. And in terms of our expectations versus the last one, obviously, we're very excited about -- the great thing about 2K is that the NBA, that VC team of it, every single release, they're pushing themselves. Strauss talked about competition and always looking over our shoulder just to see who's behind us. And in fact, the team in Visual Concepts has always been doing competition against themselves. And every iteration they try to take the game to the next level. And this NBA 2K14 is no exception. So obviously, we're very excited about the release. We've got a great marketing plan around it. We've got a great deal with LeBron, so we think we're going to generate product consumer buzz, and we have very high expectations for the title. In terms of specifics, can't give you those.

Our next question comes from the line of Arvind Bhatia with Sterne Agee.

Just clarification question, guys. The full year guidance, does that include the impairment charge or does not?

Yes, it does include the impairment charge, Arvind.

There are no further questions at this time. I would like to turn the floor back over to management for any closing comments you may have.

Just we'd like to thank our shareholders and everyone else for attending the call today. We appreciate the support. We feel like we're off to a good start. We have a lot of wood to chop for the remainder of the year, but things are looking very positive and promising. So thank you very much.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. And we thank you, all, for your participation. Good day.