Greetings, and welcome to the Take-Two Interactive Software Third Quarter Fiscal Year 2016 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications for Take-Two Interactive. Thank you, Mr. Diamond, you may begin.

Good afternoon. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the third quarter of fiscal 2016 ended December 31, 2015. 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, 2015, and Form 10-Q for the fiscal quarter ended September 30, 2015, 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. 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. Over the past few years we've seen demand for Take-Two's core offerings steadily accelerate, enabling our company repeatedly to exceed expectations. And today I'm pleased to report another quarter of better-than-expected revenue and earnings, which reflect immense consumer appetite for our products throughout the holiday season. Our strong earnings converted into significant cash flow, and as of December 31, we had over $1.2 billion in cash and short-term investments. The largest contributors to our outstanding results were Grand Theft Auto V, NBA 2K16 and WWE 2K16, along with record revenue from recurrent consumer spending. Grand Theft Auto V and Grand Theft Auto Online continue to captivate new audiences and have exceeded our expectations in every period since launch. Grand Theft Auto V has now sold in over 60 million units worldwide. In addition, consumers remain highly engaged with the vast open world of Grand Theft Auto Online, which achieved its best week ever for both revenues and active players during this holiday season, more than 2 years after launch. In the third quarter the game was not only the single largest contributor to recurrent consumer spending, it also generated its highest revenue ever. Rockstar Games has driven sustained engagement with Grand Theft Auto Online by delighting audiences through the ongoing release of free additional content and regular in-game events. During the holiday season Rockstar Games supported Grand Theft Auto Online with a rich array of updates including Festive Surprise 2015, Executives and Other Criminals, Lowriders and Halloween Surprise, all of which were key contributors to the game's record results. Rockstar Games has continued to add new content in the current quarter with an update on January 28 that featured the new Drop Zone Adversary Mode, 2 new high-end vehicles…

Thanks, Strauss. I'd like to begin by discussing our recent releases and pipeline for the remainder of fiscal 2016. In December, 2K expanded its initiatives in Asia with the commercial launch of Civilization Online, our free-to-play, massively multiplayer online game, which was developed in partnership with renowned South Korean studio XLGames. In addition to Korea, we have plans to bring Civilization Online to Taiwan, Hong Kong, Macau and China through our publishing partnerships with GameFirst and Qihoo 360. This Friday 2K will launch XCOM 2 for PC, the sequel to the 2012 game of the year award-winning strategy title XCOM Enemy Unknown. Developed by Firaxis Games, XCOM 2 features deep replayability and high level of modding support. Early review scores for XCOM 2 have been outstanding, with Game Informer magazine, GameSpot and IGN each scoring the title in the 90s. According to IGN, "XCOM 2 is an amazing game," while Game Informer magazine called it "one of the deepest and most rewarding strategy games on the market." I'd like to congratulate the teams of 2K and Firaxis Games for once again delivering a stellar title and expanding this beloved series for our company. The growing popularity of e-sports is an exciting trend for our industry. And earlier this week 2K announced a new e-sports program featuring NBA 2K16. Beginning on February 15, players on PlayStation 4 and Xbox One can form their own teams and compete in a series of in-game events to qualify for a tournament to earn a $250,000 grand prize and a trip to the NBA finals. The qualifying events will be featured on 2K TV, followed by playoff and championship broadcasts on Twitch for audiences to enjoy. We're thrilled to bring our flagship sports brand to the emerging world of e-sports by offering this unique opportunity…

Thanks, Karl. And good afternoon, everyone. Today I'll review our results for fiscal third quarter and then discuss our outlook for the fourth quarter and fiscal year 2016. All the numbers I'll be providing today are non-GAAP and all comparisons are year-over-year unless otherwise stated. Our press release provides the reconciliation of our GAAP to non-GAAP measurements. And on our website we have provided additional details regarding the non-GAAP components of our cost of goods sold and operating expenses. Starting with our results for the fiscal third quarter, net revenue was $486.8 million as compared to $954 million in last year's third quarter, which has benefited from a more extensive release slate. This result exceeded our outlook range of $400 million to $450 million [ph] 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 was $213.6 million and accounted for 44% of our total net revenue. 54% of digitally delivered revenue was derived from recurrent consumer spending, which increased 45% year-over-year. The largest contributors to digitally delivered revenue were Grand Theft Auto, NBA 2K and WWE 2K. Catalog sales accounted for $235.3 million of net revenue led by Grand Theft Auto and Borderlands. Gross margin decreased slightly to 44.8%. Operating expenses were $129.8 million, down by $37 million due primarily to higher marketing expenses in last year's third quarter from the launch of Grand Theft Auto V for PlayStation 4 and Xbox One. Interest and Other expense was $2.1 million. We recorded a tax benefit of $13.4 million, which included $32 million in tax benefits related to video game development cost. These benefits were $12 million higher than we had forecasted. And non-GAAP net income was $99.7 million or $0.89 per share as compared…

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

[Operator Instructions] Our first question comes from the line of Arvind Bhatia from Sterne Agee.

I have a couple of questions, first one just more housekeeping for Lainie, just trying to get to an apples-to-apples EPS number. I know based on e-mails a lot of people are trying to do that. If you can just maybe parse out the tax benefit at the EPS level and just maybe give us an apples-to-apples versus your $0.40 to $0.50? And then secondly, obviously very strong -- you mentioned the strongest recurrent spending quarter for you in your history and you mentioned some numbers on GTA, or generally mentioned GTA. Is there any way to think about the year-on-year growth on GTA Online kind of like the way you talked about NBA? Those are my 2 questions.

For the first question, Arvind, on the tax credit in the third quarter, we recorded $12 million higher than what we had forecast, and that's about $0.11 of the beat for the quarter.

And Arvind, it's Strauss. On the second question, what we've said, and obviously it's great news, is that the holiday season brought us the highest revenues yet on Grand Theft Auto Online and we had the highest level of engagement in terms of number of active users. Beyond that we're not going into more detail on metrics, but it is good news.

Got it. Let me just try slightly a different one. On digital downloads, are you guys able to share what you're seeing on average percentages for your key titles? Some companies have talked about 20% to 30% of the mix coming from downloads, digital downloads. Can you guys share some of that with us?

Yes, for consoles, frontline is around 20% digital distribution. It can be higher depending on the title. This past quarter it looked to be about 20%. And for PC titles, it's 90%-plus digital [indiscernible].

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

First looking at e-sports, now that you're getting involved with e-sports with NBA, have you thought about how you can maybe transition this from being more of a marketing tool to a revenue generating tool? And can you also apply some of those e-sports activities maybe with GTA online and, I don't know, gangs versus gangs or what, but I'm sure you have people that are smart enough to figure that out. But is that something that is being considered with GTA? And then secondly, for Lainie, just a little housekeeping question on the -- can you talk about maybe which of those studios you are shuttering with the business reorganization? Does this streamline anything? How does this impact the financials going forward?

Thanks, Eric, it's Karl. So I'll take the e-sports question. So in terms of the e-sports question, you've got it right. I mean, so far we see it really as a great marketing tool and it's an additional way to gain exposure for our games and to expand our audience. So that really has been and continues to be our primary focus at this point. But obviously there is an economy out there. There has been some information in the press talking about how big the economy is. I think the jury is still out at this point. It remains to be seen whether or not it would be real direct generative revenues for our company. But rest assured we're certainly looking at it. And I think that our -- the announcement that 2K just made around our NBA tournament, while it's not an enormous -- what I expect to be an enormous contributor to our economics, it certainly is making us think more and more what the opportunity economically might be for the company. So stay tuned.

And Eric, in terms of these studios, all we're saying is that it was a reorganization of a development studio and closing of 2 studios in China. And the costs that are in this quarter are the majority of the costs, but there could be about $8 million more to go forward.

And obviously there are ongoing savings once we're through the one-time costs.

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

Strauss, maybe on the digital downloads again in terms of the percentage of units that are downloaded digitally, does that plateau at a certain level? Do you see consoles eventually reaching that 90% that are on PC? And then maybe during the holiday season, do you see some shift to physical as people are gifting before it starts ratcheting back up? Maybe a little more color there would be great.

Yes. Thanks for the question. We are believers that digital distribution will continue to grow. That's been true ever since digital distribution began. It's been true for every other media business. We're pretty sure it will be true for us. Hard for us to project what the percentage will be or the time will be. It's worth emphasizing that physical distribution still is the lion's share of our console business and a very important distribution channel for us, and we expect that remain the case for some time. As we transition to digital, we do enjoy higher margin percentages. We enjoy higher margin dollars. It's a good thing, and so we're certainly happy about it. But remember, we meet the consumer where the consumer is. We can't tell the consumer where to go. Our job is to be where the consumer is. And we're ecumenical about types of distribution, business models, channels and even territories. And I'm sorry, I think I lost your second question.

The second one was just around -- specifically around the Q4 and you have the holiday season, do you see a shift to physical as people are gifting and then it starts ratcheting back towards digital?

I'm not sure we have seen that actually. I suppose it's possible intuitively, but we haven't seen it.

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

A few questions. One on the pipeline. In the past, I believe you said that you try to have at least 1 new AAA title annually. Is that something that we should still consider likely for Take-Two? Second question, at a high level, Strauss, given your media background, how are the catalog and IP values evolving for the game industry versus what you've seen in the past for some other media? And then finally, my favorite subject, VR, I know it's early, but have you seen anything over the past few months that makes you more or less bullish on VR's potential for games and Take-Two in the future?

Yes, on average, we have indeed been able to launch 1 new successful IP since 2007. And today we have 11 titles that -- franchises that have each sold at least 5 million units with an individual release and 45 that have sold several million units for an individual release. So the strategy seems to be working. The next new intellectual property that we're launching is Battleborn and we have very high hopes for it. That's obviously in the next fiscal year and this calendar year. So we remain on track. We'll see how it all pencils out, but it feels good. In terms of catalog, I think this is a point that's near and dear to my heart, and we've talked about this actually, the notion that successful, reliable entertainment businesses are businesses in which the catalog or library can be accounted for year in, year out to deliver a certain amount of revenue. And historically the change in the technology for interactive entertainment meant that most companies didn't expect catalog to amount to much. In this last quarter, for example, for us catalog is 48% of our non-GAAP net revenue. So clearly catalog really matters to us. And I think it does matter to us disproportionately because we seem to have the highest unit per SKU count sales for catalog in the industry. And I think that is driven by quality. The -- for great, reliable media businesses, catalog or library can be well over 50% of revenue period in, period out, even with strong frontline releases. And I do think that's something that one can aspire to in our business with a couple of key caveats. First of all, obviously you have to continue to deliver quality. And secondly, we have to begin to see sort of…

Our next question comes from the line of Neil Doshi from Mizuho.

Strauss, can you talk a little bit about the engagement on GTA Online? Does it -- is it fairly constant or does it kind of ebb and flow with the release of content? And then secondly, any thoughts around DLC for GTA, given the success that you've been having with online? Does it necessarily even make sense to launch standalone DLC?

Undoubtedly engagement ebbs and flows with the nature of the content. And when we do release new content for GTA Online we do see enhanced engagement and virtual currency sales will reflect that enhanced engagement. But I -- the approach of our company broadly remains: delight consumers first. And if you do that over and over again, if you delight them, if you engage them, and if you think about delivering a great experience, then the monetization, the revenues and the profitability won't be far behind. But what we don't do at our company, and it's terribly important not to, is focus on monetization leading to data, leading to content. We don't do it that way. We really do it the other way around. And I think that that's the nature of any true entertainment company. You have to focus on the experience of engaging with and entertaining your consumers. And frankly, that's what's most exciting about GTA online. Yes, it's great to talk about the numbers and that's what we do in this call. But remember those numbers are driven by record levels of consumer engagement over 2 years after the initial launch of the title. And that's a sea change for us. It's a sea change for the industry. It bodes well, very well for the future. And as far as content, I can talk about what we've done so far. We put out this free content I just described for GTA Online. It's driven great engagement, it's driven great results, and it continues to astonish us in a positive way. And anything else that comes for the game will be announced by the label in due time.

Our next question comes from the line of Mike Hickey from The Benchmark Company.

Sort of curious on the recent leadership turnover from Rockstar North, if you can provide some color on Leslie's departure? And if you could speak maybe to the relative stability of other Rockstar leadership, mainly Sam and Dan, perhaps the broader Rockstar developer base that would be helpful.

Thanks, Mike. We're really proud of the team approach that we have here at our company, and we have a very broad and deep team. I can confirm that Leslie Benzies went on sabbatical in September of 2014. He decided not to return to Rockstar Games. Since that time Rockstar North is and will continue to be under the leadership of Aaron Garbut and Rob Nelson. We're so proud of the deep and broad pool of creative talent. It's our job to move ahead day and night without ever missing a beat, and that's what we're doing. In terms of our colleagues here at every level, we enjoy long-standing relationships with all the people who make this organization tick. We aim to be the best place in the business to work at. We are imperfect, of course, and I'm especially imperfect, but our track record speaks for itself. And we have extraordinary long-term relationships, and I'm highly confident that they will continue.

One quick follow-up. Do you -- this may be hard to answer, but are you aware if Leslie plans to continue developing games? I guess the presumed risk would be him potentially drawing out other Rockstar devs from your North Studio.

Yes, listen. I have all the respect in the world for Leslie and for everyone else here, current and former colleagues. And of course I wish him all the best. I can't comment on his plans.

Our next question comes from the line of Justin Post from Merrill Lynch.

Strauss, couple of questions. I think earlier this year you commented this was kind of a light release schedule for Take-Two this year. So congrats on earnings above $1.50. Could you comment at all about the pipeline over the next few years, how robust it is? Do you still -- are you still hoping to get 1 new Rockstar title out a year? Any thoughts there would be helpful. And then just what drove, you think, the NBA 2K growth year-over-year?

So we are excited about the pipeline. We've made some announcements, of course, about upcoming titles. We talked a bit about XCOM 2, which is coming very soon and has gotten great reviews so far. We're really excited about that. That's coming from Firaxis. We have Battleborn coming in May, which will have powerful single player and multiplayer approach. This comes to the market from Gearbox, the people who brought us Borderlands, and they're immensely talented folks and we have high hopes. We talked about Mafia III coming in calendar 2016. And of course we have basketball and wrestling in our catalog. We have NBA 2K Online in China. We've launched Civilization Online in Korea. We have GTA Online ongoing and performing super well. And we have our catalog. So the good news is we have a backdrop at this company against which to populate additional titles. We have not announced our full release schedule. We have not talked about the year after next. What we have been willing to say, though, is we have an enterprise now which is solid, well financed, highly creative, stable and rational, and that enterprise is yielding great results year in and year out, results that generate high revenues, blazing trails in digital distribution and recurrent consumer spending, high profitability and strong cash conversion. And we have over $1.2 billion of cash because of the way we account for our convert. We have no debt in that context. So you have to give that background. I know the market would love it if we would talk about titles coming up the next couple of years, but we make our announcements in an effort to market our titles most effectively, and that's proven to be a sound strategy. And one thing that I do like…

Okay. Maybe one follow-up and -- from a 2K perspective. How much lead time do you need for the press and retail to formally announce a title before launch? Do you think about 4 months, 6 months or longer?

Historically it's been somewhere between 4 and 9 months, depending on the label and the release. And by the way, I know I skipped over your basketball question. I didn't mean to. I guess at the risk of sounding overpromotional, which really isn't my style, but we sold in over 6 million units. This is the industry-leading title. And the team of Visual Concepts has done an amazing job. Their scores are up again this year. And we tend to be people who -- the question we like to pose most frequently is what are we missing? What can we do better? And I promise you the team Visual Concepts in 2K will only try to make that title better and better. And if we succeed, it will continue to perform. That's also reflected in recurrent consumer spending for the title. Our sale of virtual currency is up 72% year-over-year. So when -- and again, since we're not organized around those percentages. They're a reflection of what we're doing. I think it's a reflection specifically of just how much consumers love the title.

[Operator Instructions] Our next question comes from the line of Doug Creutz from Cowen and Company.

Obviously this business has changed a lot over the last few years in the sense that when a studio works on a game, when the chips are not done, that there's a lot more content that can be made, that can be sold to consumers and you've had a lot of success there with GTA Online. When you think about resource allocation, how is your sort of philosophy towards that change over the last few years in terms of what you want people working on, how to size the teams? And in the past you talked about wanting to invest internally in your business. Are you at a point where it makes sense to invest even more heavily in sort of ongoing live service teams so that you can maintain your ability to keep a steady pipeline? Or do you feel like you're in good shape in that regard?

It's a really great question, and I think if you take a look at our headcount, our investment has been in the development side. When we showed up here in 2007 I think we had about 1,100 people who were involved with development and now it's about 2,000 people, maybe even a bit more. You should expect that to continue to grow. What we try to keep as modest as possible is fixed overhead that is not responsible for either creating intellectual property or exploiting that intellectual property. And so some of our competitors made a good deal of noise around building service centers, data centers, call centers and the like. And we'd like nothing more than to have none of that infrastructure here, although we do have some. You're right, we have had to build some expertise on the service side. I think we're proud of what we built. Pound for pound I'm quite certain we have a much leaner service team than any of our competitors and we want to keep it that way. But it means we have to be smarter, we have to innovate. But we're pretty well allergic to fixed costs and to non-revenue-generating overhead.

Our next question comes from the line of Larry Haverty from GAMCO.

First question on e-sports. If you look at it currently as marketing, could you give us perhaps dollars that are likely to go into this last year, this year and next year? And then I'm curious, you've got this alliance that you announced with folks in South Korea and that is probably the most intense economy in the world for these kinds of activities. Could that partnership materialize into significant e-sports commerce in South Korea or is that not even on the planning horizon?

Thanks, Larry. In terms of our financial commitment in the e-sports base it's not significant at all at the moment. Doesn't mean it won't be in the future. In fact, it's been a net contributor because we were an investor in Twitch early on and we had a great return on that investment. So we bet very early on this space, and it worked out super well for us. But no, it's not a meaningful commitment and there is -- the risk is de minimis, absolutely de minimis. And that's how we like to do things unless and until we're convinced that an economic opportunity exists. Our view in the business is, since only we can exploit our intellectual property, we have the ability to be somewhat judicious as businesses are developing and then step in when there is an opportunity. I think there could well be an opportunity for e-sports in Korea. It remains to be seen. It's a very active market. We consider ourselves reasonably expert. We have a terrific partner there, we know the market well and we have an on-the-ground presence, but it's a little early to say.

And then for Lainie, because she's not getting enough activity, is there any plan to make the convertible debt disappear from the balance sheet?

Sure, Larry. So for the convert, our 1.75% convertible notes mature in December. And to date it hasn't made economic sense to take them out before the maturity date. But we definitely are going to keep an eye on it as it gets closer to the maturity. And we have the option to settle it in either cash or stock. So when we get closer to the date we'll see what the best option is for us at that time.

That's December this year, right?

Yes, it's December of this year.

Ladies and gentlemen, we have no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

Thank you, everyone, for joining us. We are thrilled with the results that we've just reported. We appreciate your engagement and support. Once again, to all of our colleagues, thank you for all the great work.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.