Take-Two Interactive Software - Earnings Call - Q1 2012

Transcript

Speaker 5

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Henry Diamond, Senior Vice President of Investor Relations and Corporate Communications for Take-Two Interactive Software. Thank you, sir. You may begin.

Speaker 4

Good afternoon. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the first quarter of fiscal year 2012 and June 30, 2011. Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer, Karl Slatoff, our Chief Operating Officer, 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'm obliged to review our Safe Harbor Statement by reminding 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, 2011. These documents may be obtained from our website at www.taketwogames.com. Now, I'll turn the call over to Strauss.

Speaker 2

Thanks, Hank. Good afternoon, and thank you for joining us. There are three points that I'd like to focus on today. First, fiscal 2012 is off to a promising start. Our first quarter results were in line with our expectations, and we remain comfortable with our financial outlook for the full year. Second, we have one of the strongest pipelines of titles in development in Take-Two's history. As a result, we're well positioned to deliver substantial revenue and earnings growth in fiscal 2013. Third, we're actively investing to enhance our growth by producing content for online and mobile gaming platforms. Starting with our first quarter results, we delivered net revenue of $334.4 million and non-GAAP net income of $0.02 per share, both of which were within our previously stated expectations. We ended the period with $249 million in cash, and we have ample borrowing capacity on our undrawn credit facility.

Our biggest new release in the first quarter was L.A. Noire, the newest hit franchise from Rockstar Games. This dark and captivating crime thriller has sold in more than 4 million units since its launch in May and has been supported by multiple releases of downloadable add-on content. L.A. Noire received terrific scores and has already become a major contender for Game of the Year honors. It was also the first video game ever selected for the Tribeca Film Festival. Critics have hailed L.A. Noire as, quote, "a bold, cinematic step forward in a genre that's dying for innovation," unquote, and note that it's, quote, "absorbing investigations and an intoxicating sense of style make it an unforgettable journey through the seamy side of the City of Angels," unquote. I'd like to congratulate the team at Rockstar on the commercial and critical success of this title.

Our results also benefited from the release of Duke Nukem Forever, developed by Gearbox Software and published by 2K Games. This action-packed shooter ushered in the return of the interactive entertainment industry's most irreverent hero after a decade-long absence. Although it received disappointing reviews from critics, the release is projected to be profitable for Take-Two. The Red Dead Redemption franchise has now sold in more than 11 million units worldwide, including over 2 million units of the Red Dead Redemption: Undead Nightmare standalone disc. NBA 2K11 has sold in nearly 5.5 million units, and it's the best-selling title in the history of both our basketball franchise and 2K Sports. In addition, the release of Carnival Games: Monkey See, Monkey Do, which is our first title designed for Kinect for Xbox 360, and an array of other new releases, catalog titles, and digital offerings contributed to our results for the period.

Revenue from digitally delivered content increased 49% year-over-year in the first quarter. We released successful downloadable content packs for L.A. Noire, Duke Nukem Forever, Sid Meier's Civilization V, and Carnival Games: Monkey See, Monkey Do. The biggest contributors to our digital revenue in the quarter were continued strong sales of the downloadable content supporting Red Dead Redemption, Borderlands, and the Grand Theft Auto franchise. Add-on content continues to be an important focus for Take-Two, not only as a driver of incremental revenue and profits, but also as a means to enhance the longevity and value of our franchises. As a result of our solid first quarter results and positive outlook for the remainder of the year, we're reiterating our full-year fiscal 2012 financial outlook. We're pleased to be able to project continued profitability due to our diverse and balanced portfolio of AAA franchises.

Looking ahead to fiscal 2013, we have one of the strongest development pipelines of announced and yet to be announced new releases in Take-Two's history, which Karl will discuss in some more detail. As a result, we're well positioned to deliver non-GAAP net income in excess of $2 per share for fiscal 2013. Finally, we're very excited about the growth opportunity presented by emerging online and mobile gaming platforms. We're currently executing an aggressive and focused strategy to pursue these opportunities by leveraging our intellectual property and world-class development capabilities across all gaming platforms and backing that up with our capital. In July, we launched our first social network game, Sid Meier's Civilization World, for Facebook, which is based on our 10 million unit selling strategy franchise. It's one of the deepest interactive entertainment experiences currently available on Facebook, and it's already received critical acclaim and promising consumer response.

We also recently released our ninth offering for Apple's iOS platform, Sid Meier's Pirates app for the iPad, which is based on another popular 2K franchise. This is a prime example of how we're able to differentiate ourselves by bringing the highest quality games to any platform. The Pirates App received an 88 rating on Metacritic, and it's remained among the top 10 paid apps for iPad since its launch. Finally, we remain hard at work with our Asian partners on our three previously announced initiatives to develop online games. We expect to update you on our progress later this year. The online and mobile initiatives we've announced to date are just the beginning of what we anticipate will be exciting new growth opportunities for our company in the years to come. We have many other projects underway, and we'll have more to say about them in the coming months.

To summarize, we're pleased with our results year to date. Our creative teams remain hard at work on delivering the most innovative entertainment experiences in our industry, and we're incredibly enthusiastic about our development pipeline and outlook for growth. Your management is actively investing to exploit numerous opportunities in emerging online and mobile gaming platforms while continuing to execute our core strategy of delivering the highest quality AAA games for consoles and the PC. We're all committed to delivering growth, profitability, and shareholder value now and over the long term. I'll now turn the call over to Karl.

Speaker 3

Thanks, Strauss. Today, I'll discuss our lineup of announced new releases for the remainder of fiscal 2012 and fiscal 2013. Our next significant release comes on September 13 with the launch of Nicktoons MLB, a fun-filled family game from 2K Play. This title tips an all-star roster of animated Nicktoons characters against players from all 30 Major League Baseball teams. It's our second title to feature support for Kinect and will also be available for the Wii and Nintendo DS. On October 4, fans will experience the next installment of our top-rated and best-selling NBA video game franchise. NBA 2K12 will feature three of the greatest basketball legends of all time: Michael Jordan, Larry Bird, and Magic Johnson. It will also introduce the NBA's Greatest mode, which enables gamers to relive professional basketball's most memorable rivalries, featuring 15 NBA teams and their greatest players from the past.

Gamers will be able to match these historic teams against today's top franchises to once and for all determine the all-time best team in NBA history. This fall, Rockstar Games will release the PC version of the critically acclaimed title L.A. Noire, featuring higher fidelity, improved graphical enhancements, and 3D support. This revolutionary entertainment experience will captivate PC gamers who have been eagerly waiting to step into the breathtaking cinematic world of Hollywood's golden age. We've announced two additional Kinect titles for 2K Play this holiday season: Let's Cheer and Nickelodeon Dance. Let's Cheer utilizes Kinect's voice technology and celebrates the popular sport of cheerleading. The game features authentic cheers, licensed songs, and competitive dance routines choreographed by professional cheerleaders. In Nickelodeon Dance, kids young and old can stay physically active as they dance alongside their favorite Nickelodeon characters.

In addition to the Xbox 360, Nickelodeon Dance will also be available for the Wii. On February 7, 2K Games plans to release The Darkness II. Steeped in dark and twisted storytelling, this game is based on the popular comic book series and is the sequel to the original 2007 title. The game features unique quad-wielding combat action that enables players to unleash a ruthless force of chaos and destruction by controlling two demon arms while simultaneously firing two weapons. On March 6, 2K Games plans to launch XCOM, an intense sci-fi thriller set in mid-20th century America. XCOM is a gripping, tactical action experience in which the player leads an elite team of special government agents into battle against a vicious and destructive alien force. Featuring a bold original story, XCOM combines the deep, visceral gunplay of a shooter with powerful science fiction intrigue.

An additional slate of new Nickelodeon titles, MLB 2K12, and unannounced titles are also planned for this year. We have a very strong pipeline of titles in development for fiscal 2013, including Bioshock Infinite, Borderlands 2, and Spec Ops: The Line. Currently in development at Irrational Games, the original creator of the 8 million unit selling franchise, Bioshock Infinite lifts players out of the familiar confines of Rapture and rockets them to 1912 Columbia, an immense city in the sky. Bioshock Infinite blew away E3 attendees and judges this year with an incredible demo that won 77 editorial awards, including 41 for Game of Show. Announced just last week, Borderlands 2 is the next installment in the critically acclaimed role-playing shooter franchise, which has sold in over 4.5 million units worldwide.

Borderlands 2 features all new characters, skills, environments, enemies, weapons, and equipment, which come together in an ambitiously crafted story. The game is featured on the cover of the latest issue of Game Informer magazine and will be demonstrated later this month at Gamescom and PAX Prime. Spec Ops: The Line is a provocative, narrative-driven military shooter that's in development at 2K Games and is slated for release during the first half of fiscal 2013. In addition, we have a robust pipeline of yet-to-be-announced titles in development for fiscal 2013. We'll have more to say about these later in the year. Thanks, and I'd now like to turn the call over to Lainie.

Speaker 0

Thanks, Karl, and good afternoon, everyone. Today, I'll review our results for the first quarter and then provide some details around our outlook for the second quarter and full year of fiscal 2012. Note that all of the numbers I'll be providing today are non-GAAP results from continuing operations unless I state otherwise. Our press release provides a complete reconciliation of our non-GAAP/GAAP numbers. For the first quarter of fiscal 2012, net revenue was $334 million as compared to $375 million in the first quarter last year. As expected, year-over-year comparisons were lower due to the release of Red Dead Redemption last May. The largest contributor to revenue during the quarter was the release of L.A. Noire. Other key contributors included the release of Duke Nukem Forever and Carnival Games: Monkey See, Monkey Do, and continued strong sales of NBA 2K11 and Red Dead Redemption.

Revenue from digitally delivered content grew 49% year-over-year to $24.6 million, driven by offerings for Red Dead Redemption, Borderlands, the Grand Theft Auto franchise, Duke Nukem Forever, the Sid Meier's Civilization franchise, and L.A. Noire. Our gross margin for the quarter was 37.8%, up 120 basis points year-over-year. This improvement was due primarily to a change in the mix of our revenues by title and by label versus the prior year's first quarter. Operating expenses were approximately $120 million for the quarter. As expected, this was a significant increase over the prior year's first quarter. More specifically, selling and marketing expense increased by $25 million in order to support the launches of L.A. Noire and Duke Nukem Forever.

General administrative expense increased by $5 million, primarily due to a non-recurring credit for a legal settlement in the prior year's first quarter and higher rent expense resulting from a lease termination this year. R&D and depreciation and amortization were both about flat as compared to last year's first quarter. Moving down the income statement, interest and other expense decreased by $1 million year-over-year, as we benefited from a modest foreign exchange gain versus a loss in the first quarter last year. Our revenue and margin performance enabled us to deliver non-GAAP net income of $2 million, or $0.02 per share, which was within the range of our expectations. Our GAAP loss from continuing operations was $9 million, or $0.11 per share. As expected, our earnings were lower year-over-year due to the release of Red Dead Redemption in the first quarter of fiscal 2011.

Turning to some key items from our balance sheet, we ended the first quarter with a strong cash balance of $249 million. Our accounts receivable balance was $147 million, reflecting the releases of L.A. Noire and Duke Nukem Forever during the quarter. Inventory was $26 million, approximately flat versus March 31. Software development costs and licenses decreased to $243 million from year-end, reflecting the amortization of capitalized costs to develop L.A. Noire and Duke Nukem Forever. Now, I will provide our outlook for the full year and second quarter for fiscal 2012, which is all provided on a non-GAAP basis. For the full year, we are reiterating our previous outlook. We continue to expect revenue to range from $1.0 to $1.0 billion and non-GAAP net income to range from $0.10 to $0.35 per share.

Our expectations for margins and expenses that underlie this outlook remain mostly unchanged from what we provided on our last earnings call. Specifically, we continue to expect gross margins in the high 30%. We now expect total operating expenses to increase by about 15% year-over-year, and we continue to project interest and other of approximately $8.5 million, taxes about $9 million, and diluted shares of approximately 90 million. We have also assumed the following key release dates. Nicktoons MLB is expected to be released in our fiscal second quarter. L.A. Noire for PC, NBA 2K12, Let's Cheer, and Nickelodeon Dance are expected to be released in our fiscal third quarter. The Darkness II, XCOM, and Major League Baseball 2K12 are planned to launch in the fiscal fourth quarter. In addition, included in our outlook are some other titles planned for release later in the year.

We'll have more to say about them in the coming months. We're also issuing our initial outlook for the second quarter as follows. We expect to generate revenue ranging from $70 to $85 million, as we have no planned major releases. The majority of our revenue will come from our catalog offering. As a result, we expect a non-GAAP loss ranging from $0.55 to $0.65 per share. Moving down the income statement, we expect second quarter gross profit margins in the high 30%. Total operating expenses for the second quarter should decrease by approximately 19% year-over-year. More specifically, selling and marketing expense is expected to decrease by about 39%, as the prior year's quarter included marketing campaigns to support the releases of Mafia II and Sid Meier's Civilization V. General and administrative expense is expected to increase by approximately 5%, primarily due to higher rent and IT expense.

R&D expense is expected to increase by approximately 6%, primarily due to additional staffing at our studios. Depreciation and amortization expense is expected to decrease by about 20%, as certain assets have become fully depreciated since last year. Our second quarter outlook also reflects forecasted interest and other expense of approximately $2 million, tax expense of approximately $2 million, and an estimated share count of approximately 83 million. In summary, fiscal 2012 is off to a solid start, and we continue to expect to deliver non-GAAP profits for the full year. For fiscal 2013, we have already announced three new AAA releases, including Bioshock Infinite, Spec Ops: The Line, and Borderlands 2. We have a strong pipeline of other titles in development. We will also benefit from the sunset of our MLB license, which has been generating a significant loss.

As a result, we expect to achieve substantial earnings growth in fiscal 2013, including non-GAAP net income in excess of $2 per share. Now, I'll turn the call back to Strauss.

Speaker 2

Thanks, Karl and Lainie. We're enthusiastic about the opportunities that are on the horizon for Take-Two and our achievements to date. Our entire team is laser-focused on executing our strategy in order to bring these opportunities to fruition and deliver value to our customers, business partners, and shareholders. I'd like to thank our colleagues for their continued dedication and shared commitment to that goal. We'll now take your questions.

Speaker 6

Operator.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Thank you. Our first question is from Arvin Bassier with Stern AG. Please proceed with your question.

Speaker 1

Thank you for taking my question. First one is on the ongoing NBA lockout and wondering how that factors into your guidance for the year. Digital growth obviously continues to be impressive. Wondering if there's any color for the balance of the year based on the pipeline that you expect. Thank you.

Speaker 2

The lockout isn't good news for anyone who's involved with basketball. That said, historically, lockouts have not been good for interactive entertainment products related to the underlying sport. That said, we have a terrific title. It was in last year's release, has sold more than 5.5 million units, and had an 89 Metacritic rating, which was a record for the title and a record for 2K Sports. We think this year's title is even better. Our interactive entertainment products for basketball are as close to live action as anything you'll see in the market. It's our hope that if the lockout does continue, and obviously we hope it doesn't, but if it does, this is a place where you can enjoy basketball on a television screen. I think we'll market it accordingly.

We're also really pleased with our cover athletes and with the game itself and the way it's shaping up. We think October 4th will be a very good day for our company no matter what. We think we can mitigate any issues that come out of the lockout. Certainly, that's our goal. Lainie?

Speaker 0

In terms of digital for the rest of the year, we haven't really shared that specific forecast. For Q2, you can see as a % of sales, it will probably be a strong number as we have no new releases in the period, and a lot of our catalog has been digitally delivered. We should see that number as a % of sales be pretty strong in that quarter. For the rest of the year, we're looking at it on a title-by-title basis. We have some strong offerings that are coming out. Versus last year, we have some other titles with Red Dead Redemption and Borderlands that will be comped against it. We'll have to see how the rest of the year shapes up.

Speaker 1

Great, thank you.

Speaker 6

Our next question comes from James Heaney with Longbow Research. Please proceed with your question.

Speaker 1

Hi, thanks for taking my call. I just wanted to have a quick follow-up on the NBA question. How much of your plans are fluid and could ultimately change as a result of what's going on in the strike? It sounds like that October 4 date is pretty firm, sort of regardless of what you see with the lockout. If it extends into the season, would you potentially put that game out a little bit late? Ultimately, that $0.10 to $0.35 that you're talking about for the year, do you still think you could make those numbers sort of regardless of what's going on with the strike? I think you answered that question, but I just wanted to make clear.

Speaker 2

It would be very unusual for us to change the date for that reason. We don't contemplate it, although I suppose it's possible. It really isn't expected. We remain confident in our guidance for the year.

Speaker 1

OK, and just real quick here, last year and presumably this year, I would assume that it would be the same. With an October 4 release date, none of that product is shipping here in the second quarter. How should I think about that historically as well as this year?

Speaker 2

Yeah, we don't ship that product in the second quarter. That's right.

Speaker 1

OK, great. Thanks, guys.

Speaker 6

Our next question comes from Michael Hickey with Janco Partners. Please proceed with your question.

Speaker 1

Hey, guys, thanks for taking my questions. First question, I don't think anyone's going to say the video game industry is recession-proof. Looking forward, it looks like we may go into another period of contracted economic environment. Strauss, I'm just curious how you think your game specifically will hold up if we go into another difficult stretch. Also, as a follow-up, we have a couple of new platforms coming out from Nintendo and Sony. I'm curious how you plan to manage your R&D to support those releases. Thank you.

Speaker 2

Thanks, Mike. Look, while tempting as it may be for me to wax eloquent about the state of the global economy, I don't think anyone wants me to do that on this call. The entertainment industry is not countercyclical, despite what people say. After the 2008 global financial crisis, we suffered. Our competitors suffered. Our numbers suffered. We don't wish it on anyone. That said, I think our strategy is one that's meant for good times and bad. It's one of the reasons we designed it. We put out a limited number of what we hope will be the highest quality releases. Metacritic says we do that. As of their most recent report, we put out the highest quality releases of any publisher in the business. What that means is when it's only a limited number, we're not asking consumers to show up every day or even every week.

We're saying, come out a few times a year when we give you a real reason to turn up. They do. Most recently, with the launch of another new hit franchise for our company in L.A. Noire. When times are tough, people still do consume entertainment. They just tend to be more selective. It's the titles in the middle that really get hurt. It's the B-plus titles that are still expensive. Years ago, we talked about the barbell effect in the business as the economy got tighter. We designed our strategy accordingly. There's always room for a blockbuster. There's always room for a budget title or inexpensive catalog title. What gets lost is an expensive title that doesn't distinguish itself. We try really hard not to make products like that. We are utterly focused on quality. We think quality withstands the test of even a difficult time.

Also, it's a company that was profitable last year. We project profitability this year. Obviously, we're not unmindful of the economy as we make those projections. We have nothing drawn on our credit facility. Our convert is expected to be satisfied with equity. Effectively, one could argue that's not debt. We announced that we have $249 million of cash. While none of us wants to go into a storm, if you have to weather one, we'd like to take it from this seat.

Speaker 3

Hey, Mike. It's Karl. In terms of the new platforms that are coming out, you mentioned Nintendo and Sony platforms and how we manage our R&D in that context. I would say we manage our R&D in that context the same as we would in any situation with a new platform or even during the existing cycle. For us, it's really about looking at the IP first, figuring out what we want to accomplish from a game perspective, and then finding the right platforms to put those games on. Obviously, new platform introductions are very exciting for us because they allow us to do things that we couldn't otherwise have done before. That can also be disruptive because there is a question of, you know, you're learning how to develop for a new platform. Is that going to cost you a bit more money?

The truth of the matter is we deal with advances within console generation, within console cycles all of the time. We're constantly pushing forward and pushing our IP forward. For us, I don't think we really see a sea change in terms of how we manage our R&D cycles as new platforms come out.

Speaker 2

OK, thank you.

Speaker 6

Our next question comes from Brian Fitzgerald with UBS. Please proceed with your question.

Speaker 1

Great, thanks. As you guys have your first Connect focus titles out for a couple of months now, can you give us some color around what type of traction or engagement you're seeing with those titles? Has it caused you to adjust your thoughts about future Connect titles or future Connect integration going forward? Thanks.

Speaker 3

Hi, Brian. It's Karl. We do have some Kinect titles out, and we've announced that we've got a couple more coming out in the next coming months. I would have to tell you that we're extremely pleased with that platform. The Kinect allows you to do a lot of exciting things. We're sanguine on it. Obviously, we are because we continue to come out with products for Kinect. I'd say our perspective on Kinect specifically is positive. Our outlook is positive, and we plan to support the platform going forward.

Speaker 1

Great, thanks. Maybe one follow-on. You're seeing some publishers release subscription-based services around console titles. How important do you guys think these types of services are to the industry or to digital business models going forward?

Speaker 2

For years, we've talked about the possibility of transforming a single-issue package goods business into a subscription business. You're right, a couple of our competitors, one notable competitor, are experimenting with those sorts of models. We're glad that they are. We wish them success. We intend to learn from it. Our approach to that has been to put out the highest quality digitally delivered content in the business. That's been immensely successful for us. We've shipped more than 2 million units of Red Dead Redemption: Undead Nightmare on disk, standalone. That's a pretty extraordinary result. We get that result because we're offering phenomenal quality and a really strong value to consumers. I think the watchword here is quality and value. I don't think anyone believes you can create a subscription business unless you give consumers something really special. I don't think our competitors believe that incidentally.

It remains to be seen. I think certainly an area of opportunity. As you know, we're experimenting and focusing and investing in any number of new areas and in any number of new business models.

Speaker 1

Thanks, Strauss.

Speaker 6

Our next question comes from Daniel Ernst with Hudson Square Research. Please proceed with your question.

Speaker 1

Yes, good. Thanks for taking the call. I know we're going to learn more about your upcoming digital strategy for online and mobile in the future. Maybe you can talk a little bit about it, kind of big picture. You had mentioned that one of the things that you're proud about on Sid Meier’s Civilization World and both Facebook and on the iPad is the high critical ratings that you're getting. You're bringing kind of what I would call, you know, a gamer's game to a new platform. If you look out five plus years, how do you see the market kind of being split? Is it going to be hardcore games, you know, still making up the majority of it?

Are we going to be able to continue to grow, you know, kind of the FarmVille model where we're taking, you know, pennies from a lot of, you know, non-gamers? How are you guys kind of looking at that in terms of your strategy, where your assets are in teams that make some of the highest rated games in the world against an opportunity that's growing faster in kind of selling games to non-gamers? Walk me through how you look at that big picture.

Speaker 2

Yeah, Dan, in a tech-driven business, trying to make a prediction five years' hence is really fraught with risk. I think, you know, and I've spoken about this publicly. I'll try to keep my answer somewhat concise, that the way the world looks is going to be influenced by, among other things, a huge explosion in tablets, which will be used for entertainment in addition to communications and information. There'll be really good game platforms, and they'll be every bit as powerful as PC. We'll be informed by the ability to have intelligence in the cloud that really works with no latency. Obviously, we've seen the early investment in those areas with Onlive and others. It's still early for that. There will be multiple services. Within five years, we're going to see a new generation on the console side. What a console is or isn't probably will change.

What that ecosystem and the economic model related thereto will almost certainly change. What I think you can expect is that we will be engaged in every part of the interactive entertainment business, which means we're going to put out tentpole releases, which are the equivalent of what console-type releases are today. You'll also see us participating in the MMO business. We have three projects in Asia that are coming along swimmingly. We expect those and others will be successful and will do more. You'll see us participating in the social networking space as well. We've launched our first release there with Civ World for Facebook. It's early days for all of this. The business that Zynga's in is only four years old, and it's an enormous business. It's projected to grow rapidly. I don't doubt that that business will evolve. Certainly, our experience and our participation will evolve.

I can't call what % will lie where. What seems to be obvious is that interactive entertainment is attracting a broader and broader base of customers, that our average customer skews male and is in his mid-30s, and that Zynga's customer skews female and is in her mid-40s. In 10 years or five years, I have to believe interactive entertainment becomes more and more global and a broader demographic phenomenon. That inertia is to our benefit as long as we keep currency with our strategy of making the highest quality products, maintaining enormous efficiency, and focusing on innovation, and doing that with the backdrop of rational business operation and a conservative approach to finance. That's what we aim to do.

Speaker 3

Daniel, it's Karl, just to add a little bit to that, because I think you asked this question, but I'm not exactly sure. In terms of, you seem to be implying a comparison between more of the hardcore or traditional gamer versus the casual gamer. I can tell you one thing we don't believe here is that we don't believe that the emergence of some of these platforms that you could characterize as more casual is necessarily or will not lead to the dumbing down of gaming in general. It's not going to make, all of a sudden, the fact that you can play FarmVille on Zynga, which satisfies a very specific audience, that doesn't scratch the same itch as playing Grand Theft Auto or Bioshock or one of our other titles. I don't think that dynamic ever changes in the gaming business.

Speaker 1

Yeah, that's right, Karl. That is kind of what I was asking. You know, you're platform agnostic. You know what makes Take-Two Take-Two is your content, right, regardless of the platform.

Speaker 2

I talked for 10 minutes and Karl answered the question in 15 seconds, which is pretty much the way things go around here.

Speaker 1

Great. Thanks, guys, for the answers. I liked it both.

Speaker 6

Our next question comes from Atul Bhagat with ThinkEquity. Please proceed with your question.

Speaker 1

Hey, guys, thanks for taking my call. A couple of questions for you. Just on NBA, can you talk about the variability of NBA? If there is a lockout and if there is no lockout, what is the variability of NBA on revenue as well as on the EPS side? On your digital initiative, can you talk about your mobile and online? What % of your digital is coming from these two platforms currently? Where do you expect this to be next year? On social mobile, currently, do you see this more as broadening your awareness, broadening the brand awareness of your Civilization or other products that you're launching here? If so, what is the kind of impact you are seeing from mobile initiative on your console business? The last one, actually, is if you can give us any update on NBA Online in China. Thank you.

Speaker 2

Just in order, you know, we don't have any expectations that what will happen on the lockout, which is obviously subject to speculation, will influence where we're going to land this year, which is why we reiterated our guidance. If that changes, we'll obviously let people know. We don't expect it to. We don't break out mobile from other forms of digital distribution. In terms of social mobile, our strategy there is absolutely to take our brands and our franchises and bring them to where consumers are and where they're interested, but only to do so in a really high-quality way. We're not just doing it to promote the brands. We're doing it to make money. That's the reason we're doing it. We're investing behind it because we think there's a business opportunity. So far, it's panning out quite well.

We don't have any updates for NBA in China in this call, except to say that the project is going along very well.

Speaker 1

Thank you.

Speaker 6

Our next question comes from Eric Handler with MKM Partners. Please proceed with your question.

Speaker 1

Yes, thanks for my question. A couple of things. First, in terms of your downloadable content, you gave some good color on Red Dead Redemption and a couple million units sold there for its DLC. Is that what you would view as a typical attach rate that you would expect for something like a Duke Nukem Forever or L.A. Noire? Also, if you could talk about price points that you're seeing that work best for DLC. Secondly, in terms of your guidance, you said there's some titles that have yet to be announced. As I look out at your full year, are these titles that could be needle movers that allow you to get to the numbers you expect to? Or are these more tier two, tier three type titles, like 2K Play titles, or something like that?

Speaker 2

Yeah, we tend not to talk about typical attach rates. I know it's sort of a backwards-looking analysis. We put out downloadable content when our creative teams think they have something really interesting and compelling to issue, when we think consumers are going to love it. So far, our track record is incredibly strong at doing that. By the way, the number I gave you for Red Dead was actually the retail SKU of the 2 million units standalone retail disk. We would never talk about price points in this situation. It's just not appropriate. However, it is our goal to deliver value to customers. I think we should be proud of doing that. Some of our competitors have been criticized for not doing that. We really aim to make sure that when a consumer buys that content, he or she comes away from that experience happy.

In terms of your guidance, we wouldn't parse it in that way. I think I know what you're getting at, and the answer is there's no Hail Mary built into our guidance. We've reiterated it because we believe in it. We just met our guidance for the quarter, and we've either met or exceeded our guidance for, I believe, seven quarters in a row. That doesn't mean we always will, but we aim to.

Speaker 1

Thank you.

Speaker 6

As a reminder, ladies and gentlemen, if you would like to ask a question, press star one on your telephone keypad. If you are using a speakerphone, you may need to pick up the handset before pressing the star keys. Our next question is from Doug Creutz with Cowen and Company. Please proceed with your question.

Speaker 1

Yeah, thanks for taking my question. I guess looking ahead to Q4, you've announced XCOM for March 6. I saw that game at E3, and it's an interesting-looking game. It also seemed somewhat reminiscent to me of Mass Effect. I'm sure you're aware that EA is putting out Mass Effect 3 on the same day. Just wondering what your thinking is and why you picked that particular date and how set you are on it. Thanks.

Speaker 3

Thanks, Doug. That is the date that we've announced. That is the day we plan to release the title. I do think that, I mean, look, yeah, EA is coming out with Mass Effect. I would not necessarily compare those two titles. I think that XCOM is a very unique title, and it's got something very unique to bring to the table. I would not necessarily make that direct comparison. At the end of the day, when we release a title is a function of two different things. It's when the title is ready from a development perspective and what the right marketing window is. For us, that date, March, is a combination of both of those things, when we think the title is going to be ready to release from a development perspective and the right window for us to reach the consumer in the best way.

Speaker 1

OK, thank you.

Speaker 6

Our next question is a follow-up question from James Heaney with Longbow Research. Please proceed with your question.

Speaker 1

Thanks for taking my follow-up. I had a question on gross margins in the quarter. They were up versus last year, despite the 11% decline in sales. You mentioned it was a mix issue. I was wondering if you could just give us a little bit more color on that. Was it sort of a mix of licensed product? Was it the fact that digital was up so much in the quarter? I know you've said that digital doesn't typically carry meaningfully better margins for you guys. I was wondering if you could just give us a little bit of color there.

Speaker 3

For digital, the margin itself is pretty much in line. The margin percentage, if it's driven by our catalog, digitally delivered titles, can be slightly on the higher end of the range of our overall margin range that we usually talk about. For the overall business, for the quarter, it was really a mix of the different labels and also the different titles that came through in the quarter. We had some titles that were internally developed, some externally developed. We also had some that were subject to internal royalties. That's really what drove the mix of the quarter.

Speaker 1

Great. I'll just ask sort of the obvious question that I think everybody draws their own conclusion to. I'll ask it anyway. The $2 number for fiscal 2013, I think the assumption is that you wouldn't be able to get to $2 plus without a Grand Theft Auto title in there. Obviously, you haven't actually said anything about Grand Theft Auto in fiscal 2013. Is there any way that you could get to $2 or more without a Grand Theft Auto title for next year?

Speaker 2

If it's a math question, I think I just refer back to the diversification of the organization. It continues to be a focus of the company, and we delivered very strong profitability last year, for example, driven by Red Dead Redemption and other hits. The company continues to focus on building new franchises, diversifying its approach. There also are other benefits next year, including the sunset of the MLB agreement, which has been creating a loss.

Speaker 1

Fair enough. Just to delve into the MLB, you've historically given us some numbers as to how much of that loss, how much of a loss that typically generates. Would you mind updating us on the most recent iteration of that game? Was this year better or worse than the historical numbers you've thrown out there? Any idea looking forward, is it going to be a cancellation of that agreement or is it going to be just a more profitable one? Thanks.

Speaker 2

Yeah, we've announced the nature of the losses in the past. There's really no update. We don't talk about our agreements, potential agreements with licensors except to say that, you know, obviously, we're not in the business of entering into agreements that we believe will not benefit the company.

Speaker 1

Great. Thanks, guys.

Speaker 6

Our next question is also a follow-up question from Arvin Bhatia with Stern AG. Please proceed with your question.

Speaker 1

Thank you. Just to follow up, one, Lainie, what was the catalog sales number this quarter? Second, I was wondering what your views are, guys, on buybacks at this point with the stock and given the market conditions and given where the stock is today. Just, you know, that or in general, what your views are on buybacks.

Speaker 0

Arvin, our catalog was about 11% of our net sales for the quarter.

Speaker 2

On buybacks, this is Strauss. The research, sort of the academic research on buybacks, is most stock buybacks don't tend to create shareholder value. It's an area of some debate. There's been an enormous amount of scholarly research on the topic. Generally speaking, they just don't benefit consumers. Usually, they're management teams trying to benefit their EPS and to make a point to the market. The effect isn't terrific. That said, at any time where someone believes that there's a significant disjunction between market and value, that would be an appropriate time to contemplate such a thing. Years ago, we didn't have the capital availability to contemplate decisions like that. We are in a position now where we have a very solid capital base. We have a lot of flexibility. I wouldn't say more than that at this time.

Speaker 1

Great, thank you. That's helpful.

Speaker 6

Mr. Zelnick, there are no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Speaker 2

Great. Thank you all for joining us. I know you have a lot of other things to focus on given today's market conditions. We're strictly focused on our knitting, and our strategy remains consistent. Our results are in accord with our guidance. We're confirming this year's guidance. We're optimistic about the future, and we appreciate your support. Thank you.

Speaker 6

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