Greetings, and welcome to the Take-Two Interactive Software Q4 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 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 the 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…

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, provide 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 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 an -- 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 a 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…

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 was $109.6 million, down by $15.4 million due primarily to higher marketing expense last year for the launch of Evolve. Interest and other expense was $0.2 million as we generated higher interest income than the last year's fourth quarter. We recorded a tax benefit of $2.5 million, which…

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?

[Operator Instructions] And our first question comes from the line of Mike Olson from Piper Jaffray.

I was just curious. There were some changes in the industry and wondering how you're thinking about Take-Two being affected or not affected by some of those changes in the ecosystems that would be around the PlayStation 4.5, a new Nintendo console, virtual reality -- I guess you mentioned eSports. Are those various things opportunities, challenges or indifferent for Take-Two?

I think in general, these are all opportunities depending on how things pencil out. A successful, new console gives us another opportunity to release titles, whomever it comes from. eSports is a very exciting area that we talked about in today's call. We're just beginning to participate through our NBA 2K tournament. I think the fact that there were 92,000 teams that were involved was pretty extraordinary. Right now, eSports still tends to be a marketing vehicle for our games and create more engagement, but we are able to monetize that engagement with the recurrent consumer spending. So that's certainly a good thing. And I've talked a bit about VR in the past. And there is a lot of excitement in the marketplace, and a lot of our people are excited, too. We're still in R&D mode around here because this is still not a consumer business. We want to be really clear. If this is the consumers' platform of choice, we'll bring our intellectual property to it aggressively and ambitiously. We just tend not to vote when we don't have to. The vote that we cast is be wherever the consumer is -- that's channel distribution vehicle, platform, product type, geography, be there with the best intellectual property in the market and where we don't have to vote. Yes, we don't. So the wind's at our back, it's also our competitors' back. We think the people who win most are those that are the most creative, the most innovative and the most efficient, and that's what we aspire to be.

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

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, fourth, moderating results. Lainie?

For the convert, we're accounting for the convert as if they are to be settled in stock, which is what is included in our guidance right now, but it's -- that's our current intent, but we have the option to settle on either cash or stock. So when we get closer to the maturity date, we'll evaluate the best way to settle the convert. We can look at where our cash balance is at that time. So right now -- at the end of the year, we were up $1.27 billion to have a strong balance. And we'll see what the potential uses for that cash are, and we'll determine what our best option is at that time.

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.

And our next question comes from the line of Ben Schachter from Macquarie.

A few questions. One, I think I know the answer to this but just to clarify. All the guidance there -- all the figures you've given us so far include only the announced title date. That's the first question. Second question, Strauss, I think you mentioned that you expect FY '18 revenue and earnings to grow. If you could just discuss why you have confidence to give that -- give so much guidance today? And then finally, any update on just how you're thinking about the cash and how you're thinking about M&A in general?

So to your first question, just to clarify, we've announced the entire release schedule for the year, and that's what you should expect our release schedule to be. And that's what our outlook is based on. Any changes would be performance-based largely. In terms of -- I'm going to skip to question 3, which is cash uses. And our view remains the same, which is there are 3 potential uses: support organic growth, which has been our story all along, hasn't been a very good story. And we do think there are wonderful opportunities for organic growth, whether that's new types of products or expanding our focus in other geographies, like Asia. It's been very fruitful for us; or supporting new platforms as they develop or new -- other new opportunities like eSports. There are opportunities for inorganic growth. Those tend to sort of come along when you least expect them. That's why we believe cash is a strategic asset. We are very disciplined. We do believe in doing accretive deals that does distinguish us from some of our competitors historically. And retrospectively, that's been a very good call on our part. And then, of course, we're -- we believe in returning cash to the shareholders. In the past several years, we purchased about $300 million worth of stock, and we certainly have an opportunity to do so in the future. We have an outstanding authorization for a buyback. Would you mind repeating your second question? Because I seem to miss 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.

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

Just -- this is Tim O'Shea first for Brian. So just another one on the outlook. I know that Lainie mentioned the higher OpEx in taxes next year, but I was just hoping you might help us understand the specific situation that might be driving the disconnect between top line growth and EPS growth outlook for fiscal '17. Is there a game that's going to be less profitable than expected? Or maybe I noticed that large deferred revenue outlook. Just how should we interpret this? And then I had a quick follow-up.

Well, for next year, when we're looking at the disconnect in terms of the bottom line, what you said is true. Our -- we don't have as big of a tax benefit. We had $0.33 per share this year. And next year, we're going to only have $0.14 per share. And then also, our operating expenses are going to increase about 29% primarily due to higher marketing expense. Our margins are higher. So it doesn't -- so the pipeline is set and is strong and it's just a big difference because of the marketing expense as well as the taxes.

Okay, got it. And then just broadly speaking -- it's a higher level question, but we've seen some consolidation across the space with the biggest games in each category taking more market share. I'm just curious, first of all, if you would agree with that sentiment and, if so, how that trend towards consolidation impact your planning decisions around both your larger franchises, like GTA and NBA, and maybe also your smaller ones which may not be category leaders.

Yes. I mean, in this instance, we would agree with what you're observing, which is that the bigger and better are getting stronger. And that's consistent with the nature of the entertainment business, which is -- as entertainment businesses mature, a greater proportion of consumer attention and, therefore, revenue goes to the highest quality releases. Essentially, when entertainment businesses are nascent, people are willing to experiment among another -- a number of brands. As they mature, all consumers' tastes tend to narrow and focus on the biggest titles in the business. This has been true from time immemorial, since the beginning of the electronic entertainment business across every different type. And it's why we've had the strategy that we've had at this company, which is put out -- create and put out a high -- the highest quality releases and do a limited number so you can really focus and focus not just on your existing IP but try to launch new successful IP every year. And we've been able to do that most years since we took over the company. And that's why we have 11 titles that have each sold over 5 million units in an individual release and something like 45 that have each sold 2 million units or more in an individual release, which we think is a standard bearer of the industry. So yes, the strong gets stronger, and that was true with motion pictures and television and the music. It's going to be true in interactive entertainment, and that puts pressure on us and on our key competitors to continue to deliver the highest quality titles and to focus on doing so. So we see it as an opportunity as much as a challenge. And certainly, for the haves, it's a much better place to be than the have-nots.

And our next question comes from the line of Arvind Bhatia from CRT Capital.

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, in terms of Mafia III, obviously, this is a title that we're very, very excited about here from a creative perspective, from -- and -- but also from a commercial perspective. We think this title has the perfect combination of what people are looking for in an open world, story based driven title with a lot of things and a lot of games don't have. A lot of time and money has gone into it. We've got a great creative team being led by Haden Blackman. So we are very excited about this title and the prospect of this title. And when you get this right in this particular genre, you can obviously achieve significant success. In terms of -- and we've done that before in general. So in terms of providing you with a specific model that you can go by, I don't have anything specific for you to go there. But I can tell you that our expectation is that we should be exceeding anything that we've ever done on the Mafia side before and again from a creative perspective and a commercial perspective. So you can always look at the previous Mafia titles as a benchmark, but again, I wouldn't stake too much on that because we think this title will vastly exceed what the previous Mafias have been able to accomplish over the past.

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

You mentioned that you've had success with some of your older Grand Theft Auto titles from the PS2 that are on the PS4 with the ability to play older titles. Just wondering if there's any appetite there for -- actually to remaster some of those older titles into HD? Is that something sort of conceptually that you think would be a worthwhile use of your talent and time?

That's something that the labels will decide and talk about in due course. Certainly, we wouldn't rule it out. It will be largely an economic decision. I don't -- we wouldn't do anything that's not going to look great creatively. So the starting point is, is this going to delight consumers? Is this going to look good? You know that we're a company that is not driven first and foremost by, "Can we create revenue this way?" We would have started by saying, "Will this be exciting to consumers? Will they be happy with it? Will it reflect well on our brands? Will it reflect well on our company?" And if the answer is yes, then it may well be a compelling opportunity. But if the answer is indifferent or no, then even if we have an opportunity to make a few bucks, we probably would decline. So I think that's the lens through which we look. The actual decisions are made by the labels.

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

This is San in for Neil. You mentioned the release slate is pretty -- is confirmed for the year, but does that include any content drops in DLC [ph]? In other words, could we possibly see content that might not otherwise be baked in at the moment? Then the second question is regarding NBA 2K. There has been really strong growth in registered users. Just wondering if you can share any -- maybe additional metrics, like active users or paying users. And is the strategy there to drive a greater number of players to pay? Or is it just to drive higher ARPU per paying user? And if we can see maybe potential other revenue streams like ad-based streams for those that aren't paying.

So in terms of our outlook, we have contemplated recurrent consumer spending in the outlook. We've contemplated product drops. There could be changes there, and perhaps, there is some opportunity. But this is the outlook as we see it now. And we contemplated all aspects of our business, but things can change. In terms of metrics, we haven't really shared a great deal of metrics on our in-game spending. We give the broad -- certainly give broad numbers around recurrent consumer spending. And it's been great, are nearly -- more than 1/4 of our non-GAAP net revenue last fiscal year [Audio Gap] was recurrent consumer spending. So certainly, the numbers are meaningful. And we have mentioned that we have 31 million users, signed-up users, of Grand Theft Auto on -- oh, sorry, of NBA 2K Online in China. So we have mentioned that metric. We have talked about usage of Grand Theft Auto Online in the fourth quarter. So we've given some metrics. We don't tend to give a broad array of metrics because this is still a work in progress and still developing activity here and because we don't want people to extrapolate. Even though the results have been excellent, we don't want to extrapolate that they're perpetually a nice, gentle, upward-sloping curve because it's just too early in our experience to see that. In terms of our strategy, our strategy -- and I know it sounds like motherhood and apple pie, but it genuinely is our strategy. We're trying to delight consumers as they engage in our products. And when we make a content drop, we want that to be something exciting to consumers. And we know if we do that, then we will increase engagement. And therefore, we will increase spending, and therefore, we'll increase revenue and…

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

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. I don't -- GTA V has continued to sell. As you know, we've talked about the unit sales. Certainly, there's been great news there because we've sold so many units. We have not tracked what happens to the GTA V sales when new content is dropped into GTA Online. So we'd be speculating about what influence there would be, but I think anything that makes GTA Online exciting is good for GTA V. And I do expect that it's going to continue to be a very strong title going forward and a great catalog title over time that -- if history is any guide, that would be the case. In terms of the pipeline for online content on an ongoing basis, that's something for Rockstar to talk about in due time, but there is content coming.

Okay, cool. The last question, Gearbox had sort of some encouraging, I guess, commentary on the initial sales of Battleborn. It sort of reflected on Borderlands, and I think it was maybe outpacing that a bit. And my impression was they sort of suggested maybe it was a slower start but had the potential to build into something meaningful. I think Borderlands, life to date, has done maybe 8 million units. So curious if you share that enthusiasm for the future sales potential of Battleborn. And then also, if I remember -- Borderlands had done pretty well, at least in terms of attaching digital content, but I'm sort of curious on more forward sales curve of -- if you'd seen sort of outside success in terms of full game downloads of that game.

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 game play. But I wouldn't want you to draw 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.

I guess, I meant -- I was meaning to ask, Strauss, the percentage of sales full game download versus physical.

Yes, I don't think we've talked about it yet, Mike.

And our final question comes from the line of Drew Crum from Stifel.

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 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. And as our industry transitions more towards full game downloads, we expect to grow over the long term.

Yes, and in terms of -- this is Strauss. In terms of Asia, our Asia strategy was set in motion a number of years ago when we opened a headquarters in Singapore, became a publisher in Japan and entered a number of other markets. And then we also tried new kinds of products that we felt would be quite challenging to launch in Europe or in the U.S. but could be opportune to launch in Asia largely free-to-play, massive-multiplayer games. We've had strong results with NBA 2K Online in China, and we've mentioned those as part of today's call. We've launched Civilization Online in Korea. And that, we'll also launch in a number of other Asian markets. And we're working on a number of other really interesting opportunities. So that business has already been very fruitful for us, has grown from a very small part of our business to a meaningful part of our business. And it's a very exciting part of the world, and people's appetite for games is somewhat different than here in the U.S. or in Europe with a significant focus on massive-multiplayer games and a significant focus on the free-to-play model. So we don't believe that all models work in all markets. We think you have to tailor what we bring to a particular market with the needs and desires of the consumers in that market. So we're incredibly excited about Asia. And I would just like to make the comment that we, as an industry, are just scratching the surface in China of what's possible. And I do believe -- and it may be a contrarian point of view, but I think that an area of China that's remained very challenging which -- has been the distribution of Western products. I think the Chinese government realize more and more that it is actually not challenging, that it's actually beneficial, that it's what consumers want, that it will not cause consumers to have a view of Chinese society that is, in any way, unfortunate for the government. And I think restrictions will probably be loosened. My guess is not within the next 12 months but, I do believe, in the coming years. And that's going to be incredible news for us because, of course, the middle-class alone in China is bigger than all U.S. households. So we think that there is an amazing opportunity there. We're poised for the opportunity. Naturally, we comply with government regulations wherever we are in the world, and China is no exception. But I am of the view that it's time for restrictions to be softened, that it will be beneficial for Chinese society as they see it, not just as I see it. And I do believe that creates a massive opportunity for us and not reflected in this year's numbers, next year's numbers or anyone's outlook for the industry.

There are no further questions at this time. I'll turn the call back over to management for any closing remarks.

Well, thank you so much for joining us today. We're very pleased with our results. We're proud of our outlook, but what we're really proud of is our colleagues all around the world, almost 3,000 of them, who are engaged every day in trying to make the very best interactive entertainment properties on earth, to bring them to market and to run a really solid, serious and responsible business and making sure that we delight consumers as they experience our products. So we're -- we feel very grateful to have an opportunity to work in this business, about which we're so passionate. We're grateful to our colleagues, and we're really pleased with the results. Thanks for joining us.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your time and participation. You may disconnect your lines at this time, and have a wonderful rest of your day.