Greetings, and welcome to the Take-Two Interactive Software Third Quarter Fiscal Year 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications. 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 year 2017 ended December 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'll 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 GAAP and, unless otherwise stated, all comparisons are year-over-year. 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 Take-Two had a highly successful holiday quarter. Consumer demand for our new releases and catalog were strong throughout the period, and players continued to engage significantly with our games after purchase. As a result, we delivered better-than-expected bookings, including our best ever quarter for recurrent consumer spending, along with double-digit growth in both net revenue and net cash provided by operating activities. As of December 31, 2016, we had over $1.4 billion in cash and short-term investments on our balance sheet. Grand Theft Auto V and Grand Theft Auto Online continue to outperform our expectations as they have in every quarter since their release. Grand Theft Auto V remains the highest rated game of the current console generation and the must-have title for gamers on both console and PC, with selling now surpassing 75 million units. According to data from the NPV Group [ph] that combines physical sales and full game downloads, Grand Theft Auto V was the #6 selling game across all platforms in 2016. In addition, Grand Theft Auto Online continues to deliver growth in both engagement and bookings with a record number of players in December, driven by the ongoing release of new content. During the third quarter, Rockstar Games supported Grand Theft Auto Online with 4 significant updates: Bikers, Deadline, Import/Export and Festive Surprise 2016, and has many more planned going forward. The sustained performance of Grand Theft Auto V and Grand Theft Auto Online is a remarkable achievement and a testimony to Rockstar Games' tireless commitment to excellence, especially since these titles initially launched more than 3 years ago. On October 7, 2K launched Mafia III. Developed by 2K's newest studio, Hangar 13, Mafia III received critical praise for…

Thanks, Strauss. I'd like to begin by congratulating our teams on delivering a strong holiday quarter. Our consistent ability to release high quality, engaging entertainment experiences across multiple platforms and distribution channels is both a distinguishing characteristic of our organization and a key driver of our success. Creativity and innovation are among Take-Two's core tenets, and those principles inform and inspire our work on a daily basis. As we continue to diversify our business, we aim to broaden our portfolio with offerings that captivate and engage players in new and exciting ways. To that end, I'm extremely pleased to welcome Social Point to Take-Two. Social Point's 3 cofounders, Andrés Bou, Horacio Martos and Marc Canaleta, have worked together for almost 6 years, and its senior leadership team has an aggregated nearly 100 years of experience in the mobile games business. Like Take-Two, Social Point produces high quality entertainment that can attract and retain a loyal, highly engaged player base and deliver sustainable results. Social Point focuses on mid-core games that have greater game play depths than casual games, and the company's titles typically monetize and retain players at higher rates than its competitors in the segment. Social Point currently has multiple profitable games in the market. It's 2 most successful games, Dragon City and Monster Legends, have been downloaded more than 180 million times. Dragon City launched on mobile in 2013 and as a simulation game involving breeding, building and battling in which players trade and expand their city and can collect more than 500 unique dragons. The title consistently has been among the top 100 grossing mobile games and top 20 grossing simulation games in the United States. Monster Legend was also launched in 2013 and is an RPG involving breeding, building and battling with nearly 400 monsters. The…

Thanks, Karl, and good afternoon, everyone. Today, I'll discuss fiscal third quarter results, share some details regarding our acquisition of Social Point and then review our financial outlook for the remainder of the year. As mentioned by Strauss and Karl, Take-Two had a strong holiday quarter. Sales of our offerings significantly exceeded our expectations, with total bookings growing 51% to $790 million. Of this amount, 47% were digitally delivered bookings, which grew 66% to $336.3 million, a new record. The upside to total bookings is driven primarily by the better-than-expected performance of Grand Theft Auto V as well as recurrent consumer spending on Grand Theft Auto Online and NBA 2K17. Our better-than-expected bookings converted into strong net cash provided by operating activity, which grew 72% to $291 million. We deployed $6.1 million of capital expenditures. And as of December 31, our cash and short-term investment balance was $1.44 billion. While the performance of our business exceeded our expectations as reflected in our strong bookings and cash flow growth, this outperformance is not reflected in our GAAP net revenue and net loss, primarily for 3 reasons: First, our bookings outperformance was driven by titles that we are required to defer, and therefore, our revenues and profits won't benefit from these bookings until future periods. Second, because of the better-than-expected performance of Grand Theft Auto V and Grand Theft Auto Online, we recorded higher-than-forecasted internal royalties, which are calculated using results that are adjusted to exclude the impact of deferrals and unlike certain other cost of goods sold are not deferred. And third, during the third quarter, we recognized high development cost in Mafia III than forecasted due to timing. These costs will be offset by lower development costs in the fourth quarter. Turning to some details from our third quarter income…

Thanks, Karl and Lainie. On behalf of our entire management team, I'd like to thank our colleagues for delivering another strong quarter. 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 Ben Schachter of Macquarie.

On continued execution. Few questions. One, can you remind us what the units sales were for the previous Red Dead in its first year? And how you're thinking about the potential for the next generation in FY '18? And then Lainie, in the past you had said that OpEx should increase this year, this fiscal year for some promotional activity for next year. Have we seen that or should we expect anything in the next couple of months? And then, finally, on Social Point, how should we thinking about that how that may impact Rockstar or 2K's mobile offerings over time?

Ben, thank you. The first year for Red Dead, the last release was 8.5 million units and lifetime to date is around 15 million units. We're not talking about our expectations except obviously we're incredibly excited about the title, not just Red Dead, also the online offering to come. So Rockstar will talk more about the title. But obviously, we're -- there's a great anticipation both on the part of ourselves and consumers. Lainie is going to talk about your second question.

Sure. For marketing expense for the year, we did talk at the beginning of the year that it would be up for the whole year to support our fiscal '17 titles and also some of our fiscal '18 titles. And we've see that throughout the year, and we'll continue to see that through Q4 .

And then with regards to Social Point, look, we acquired Social Point because we see it as a strong stand-alone company that's expert in the mobile and free-to-play market, and they have owned intellectual property in a multiplicity of hits and they now had to engage with consumers and then to monetize that engagement. We want them to keep doing what they're doing and keep growing the business. We obviously have high expectations. We love the fact that the deal was accretive to bookings and cash flow from operations immediately and expect it to be accretive to net income in fiscal '18 without regard to amortization and transaction costs. In terms of potential engagement with the other labels, it's too early say. One thing that we pride ourselves on is that our enterprise is comprised of creatively independent entities where people can pursue their -- not only can but are encouraged to pursue their passion. We all work together collectively, but the cooperation then that occurs will be organic. It won't be driven by the center.

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

Two questions for you. First, with regards to fiscal '18, I think at the beginning of the year, you talked about the release slate for fiscal '18 being one that's more normalized than what we've seen in fiscal '17 or fiscal '16, which would seem to suggest we'll get a couple 2K Studio titles to still be announced. Is that still the case of that -- it will be a "normalized" release type of year? And then secondly, with the Social Point acquisition, you did include some stock. Is there any particular reason why you didn’t do an all-cash deal and why you included some stock?

Hey. Thanks, Eric. So in terms of our comments, which have been limited about fiscal '18, I think the only thing that we've said or at least for Karl saying is we expect to see growth in bookings and cash flow. And all we've said about the release schedule so far is, of course, reflecting Rockstar's announcement about Red Dead Redemption 2 and the fact that we expect our normal annual releases and then of course, you would expect to see our recurrent consumer spending opportunities and catalogs sales. But we haven't talked about anything else yet. And in terms of Social Point, the idea of making sure some of the consideration was -- in stock is to align interest, to make sure that the principles of Social Point have a stake in our enterprise and as the enterprise continues to perform, they benefit from that and to make sure that all of our interests are aligned.

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

The -- curious about GTA Online. It continues to grow. And looks like a big piece of that is the content that continues to come into the game. And so as much as you can, Strauss, I was sort of curious if we can expect some more level of content moving forward. And looks like there's also a fair amount of player-created content. I'm curious how that's contributing to the growth overall of that digital piece of your business. And then second question, wondering as a sort of ramp into the release of Red Dead. If you feel that GTA and Red Dead can sort of coexist or find a harmony, or if anything that was a net positive, I guess, sort of intuitive that perhaps Red Dead might disrupt a little bit the GTA Online player base, given that there's pricing overlap in players.

Mike, thanks. So we obviously will keep continued engagement with GTA online is driven at least partially by the ongoing content creation, which people love. And Rockstar has said they will continue to support GTA Online with more content to come. Anything more specific, of course, will come in due time from Rockstar. I don't really have a point of view on player-created content to share. And on Red Dead, I'm fond of saying entertainment is an unusual animal, in that entertainment properties don't really compete with other entertainment properties in that you never need entertainment. Entertainment is something that you want to have, but it's not a need to have. If nothing in the market appeals to you at some time, there's no reason to go and get it. And if multiple things appeal to you, avid consumers will consume all of those things. So I don't think there's any competitive dynamic with any of our upcoming releases apart from the fact that our success is driven by quality. So I think the success of Red Dead, which is highly anticipated, will be driven by its quality, and I think the ongoing success of Grand Theft Auto Online is driven by its extraordinary quality.

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

Based on what you said and what one of your competitors who's already reported said, it does feel like the consumer adoption of digital full game downloads is moving along at a pretty rapid pace. Is that creating any pressure on the retail channel? Are you getting any -- are you seeing any pushback? Does it cause any concerns on your part that, that disruption may be coming?

Yes. The channel remains healthy. Our primary source of distribution remains physical distribution at 75% of our new generation console sales. But you're right, it is -- digital distribution is growing at the benefit to consumers, and we actually derive gross margin benefit from it, and we can't deny that. But our retail remains a very important partner. That hasn't changed, and we don't expect that to change anytime soon.

Our next question is from Timothy O'Shea of Jefferies.

Strauss, you touched on the brand new online multiplayer experience for Red Dead 2. So I was just hoping you might expand on that, what it might entail. And should we think about this as being analogous to GTA Online or maybe something else? And then quickly, second, what kind of marketing support should we expect for Red Dead 2? The reason I ask it's because looking back when you announced Red Dead back in October, it kind of seems like you set the gaming world on fire and all it took was basically one image added to Rockstar's website. So just curious if you think you can drive any leverage using various online tools and social platforms?

So in terms of the online experience, Rockstar will announce more in due time, and that's not something we typically talk about on these calls except to say that we're really excited about what is to come. In terms of marketing support, look, we support all of our releases very significantly. We're incredibly proud of our marketing teams throughout the company, and we're -- our support is quite significant for all of our releases. Social media is a big part of marketing plans today. Digital media is a big part of all of our marketing plans. And outdoor remains a big part of our plan. So I think you should expect to see, with regard to all of our releases, very significant marketing support.

[Operator Instructions] Our next question comes from the line of San Phan of Mizuho.

Concerning your previous comments regarding mobile, was there anything in particular that basically maybe helped evolve your perspective on the mobile opportunity for Take-Two when you decided to acquire Social Point? And then second question was just hoping to get your latest thoughts on Nintendo Switch and whether we could expect to see exclusive titles in the platform or just forward to planned releases like NBA Life for now?

So our perspective on the mobile hasn't changed at all. We're aware of the size of the business. It's a $40 billion market. And we found it exciting, and we are relatively significant participants in mobile and in free-to-play now through titles like the NBA 2K Companion app, WWE SuperCard and other forms of supporting our titles that are reflected in recurrent consumer spending. We had a record quarter for bookings related to recurrent consumer spending. So obviously, it's an important part of our strategy. What we love about Social Point is that it addressed the exact criteria we were looking for in an acquisition in the space in that they own their intellectual property, in that they have a track record of creating a multiple hits, not just one hit, in that they have real scale, in that they are profitable, and in that their team has a great culture and a culture that fits well with ours, we believe. We were also looking for an acquisition that would be immediately accretive to bookings and cash flow from operations, and this one will be. So our thinking hasn't changed. What changed with Social Point was an opportunity to bring a company into our enterprise that meets all of the criteria we were seeking, and that's what makes it so exciting. With regards to Switch, we're excited about Switch. We're supporting Switch with NBA 2K18. We've said we're supporting the platform. I've said over and over again that when Nintendo comes to market, you never want to count them out. So we're excited about it. The only thing we've announced so far is the basketball title.

There are no further questions at this time of the audio portion of the conference. I would now like to turn the conference back to management for closing remarks.

On behalf of all of our colleagues and our entire management team, we want to thank you for joining us today. Thanks for our shareholders. Mostly thanks to the people at this company all over the world, many of whom are listening now, for their incredible contributions, their great creative work, the passion with which they pursue their jobs, the great job they do at marketing, at distribution, accounting, cash management, investor relations. We all work together here in every part of our business to achieve these results. It's a shared victory, and we couldn't be more pleased. So thank you everyone.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful rest of your day.