Take-Two Interactive Software - Earnings Call - Q3 2012
February 2, 2012
Transcript
Speaker 6
Greetings, and welcome to Take-Two Interactive Fiscal Third Quarter 2012 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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. Thank you, Mr. Diamond. You may begin.
Speaker 5
Good afternoon. Welcome, and thank you for joining Take-Two Interactive Software's conference call to discuss its results for the third quarter of fiscal year 2012 ended December 31, 2011. Today's call will be led by Strauss Zelnick, Take-Two Interactive Software'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 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 1
Thanks, Hank. Good afternoon, everyone, and thanks for joining us. Today, we're pleased to announce results for our third quarter, which were solidly within our outlook range. Take-Two continues to execute strategically, creatively, and operationally, and our long-term outlook for growth and profitability is extraordinarily promising. For the third quarter, we delivered net revenue of $236.3 million, non-GAAP net income of $0.27 per share, and we ended the period with $453.3 million in cash. The strongest contributor to our third quarter results was the successful launch of NBA 2K12, which received the highest ratings in the history of our basketball franchise and 2K Sports. The quality of this title, coupled with 2K's creative and well-orchestrated marketing campaign, enabled us to sell in nearly 4 million units, despite the NBA lockout during the initial launch.
Sales of NBA 2K12 have accelerated since the start of the basketball season, and we believe that the title will continue to grow its audience throughout the year. I'd like to congratulate 2K's Visual Concepts Studio and the marketing team at 2K Sports for taking an innovative approach to addressing this year's release and delivering an experience that once again raises the bar for excellence. As a result of their hard work, we expect fiscal 2012 to be another profitable year for 2K Sports. Our third quarter also benefited from robust holiday sales of our catalog, including the Grand Theft Auto franchise, Red Dead Redemption, Midnight Club Los Angeles, and Borderlands. In addition, L.A. Noire continues to be a key title for the company and has sold in nearly 5 million units worldwide since its launch in May.
According to NPD sales data for the U.S., it was the top-selling new intellectual property in our industry during 2011. Our ability to create new wholly owned intellectual properties and convert them into valuable franchises is a competitive advantage and an integral part of Take-Two's DNA. Rockstar's success with L.A. Noire is a prime example. Expanding our digital offerings remains an important component of Take-Two's strategy. Digitally delivered content represented 11% of net revenue in the third quarter, led by offerings from our Grand Theft Auto franchise, Red Dead Redemption, Borderlands, and L.A. Noire. Among these, our biggest seller was Grand Theft Auto III: 10th Anniversary Edition for iOS and Android. This is our first title for Android and our highest-selling mobile release to date.
It's just one example of how we're increasingly able to generate meaningful incremental income from our rich catalog of fantastic games by tailoring the experience to emerging platforms. At Take-Two, we focus on creating the most innovative and compelling interactive entertainment experiences that delight consumers with every new release. As we recently announced, Max Payne 3 is now planned for launch on May 15, joining our stellar lineup for fiscal 2013. Pre-orders for the title are strong, and the new trailer has received significant attention from fans. We're confident that Rockstar will deliver another groundbreaking entertainment experience with Max Payne 3, which is shaping up to be one of our most exciting releases ever. I'd now like to discuss some of the strategic initiatives that we believe position Take-Two for even greater long-term success. We continue to invest aggressively in making our content available to consumers on all relevant platforms.
Our three online projects, NAJA, are moving ahead as planned and are positioned to become important contributors to Take-Two's future performance. In particular, the online version of NBA 2K, which we're co-developing with Tencent in China, is in closed beta testing, and our initial user engagement with the title has been outstanding. Expanding our lineup for smartphones and tablets by leveraging our proven franchises and development expertise. In addition to Grand Theft Auto III, during the third quarter, we released an iOS version of NBA 2K12. We have many other mobile projects in the pipeline, all with the goal of enabling consumers to engage with our franchises wherever and whenever they want. In November, we raised $250 million through a convertible note offering.
By taking advantage of a limited window of opportunity to raise capital on attractive terms, we've enhanced our ability to pursue acquisitions, invest in additional internal projects, and take other actions to drive shareholder value. This cash, coupled with our improved renewed credit facility, bolsters our already sound foundation to grow our business. I'm extremely pleased that Take-Two has all the pieces in place to achieve long-term success and returns for our shareholders. We have a proven strategy focused on delivering the most innovative and compelling interactive entertainment experiences, the most talented developers and marketing team in our industry, who set new benchmarks with every release, the strongest pipeline in the company's history, and ample resources to pursue our many growth opportunities across new platforms and regions.
We expect fiscal 2013 to be one of our best years ever, with substantial revenue growth and non-GAAP net income in excess of $2 per share. Our entire team is focused every day on maximizing and achieving the potential of our enterprise. I'll now turn the call over to Karl.
Speaker 3
Thanks, Strauss. Today, I'll review our lineup of upcoming releases. Next Tuesday, 2K will release The Darkness II. Based on the supernatural comic book series, gamers will experience fast and intuitive combat throughout the game's stunning world. Two weeks ago, 2K launched a demo for The Darkness II, which has been well received by the media and consumers. On March 6, 2K Sports and 2K Play will usher in the start of the 2012 baseball season with releases of Major League Baseball 2K12 and Nicktoons MLB for Nintendo 3DS. Major League Baseball 2K12 features Cy Young Award-winning pitcher Justin Verlander of the Detroit Tigers. This title will once again be supported by the million-dollar Perfect Game Challenge, which will deliver even more excitement and intensity by staging a live eight-person final tournament that will determine our new $1 million champion.
Nicktoons MLB for Nintendo 3DS takes a more lighthearted approach to America's favorite pastime by pitting an all-star roster of Nicktoons characters against players from all 30 Major League teams. This title will be 2K Play's second offering for 3DS and will provide hours of 3D baseball action on the go. Beyond fiscal 2012, we have the most robust lineup of titles in Take-Two Interactive Software's history. On May 15, Rockstar Games plans to launch Max Payne 3, one of this year's most anticipated new releases. Bringing powerful storytelling back to the action shooter genre, Max Payne 3 will deliver an intense gaming experience. A first for the series, the title's multiplayer offering brings the game's signature dark, cinematic feel and fluid gunplay into the realm of online multiplayer.
Playing on themes of paranoia, betrayal, and heroism, Max Payne 3 features a wide range of new and traditional multiplayer modes, all delivered with the same epic visual style of the single-player game. During the first half of fiscal 2013, 2K will launch Spec Ops: The Line, a fresh take on the military shooter, combining up-close and personal combat with a thought-provoking story. Players assume the role of a U.S. Delta Force operative leading a search and rescue mission set against the backdrop of a sandstorm-ravaged Dubai. Spec Ops: The Line is 2K's exciting foray into the modern military genre, with compelling action that moves players beyond the simplistic conflict of good versus bad. In addition to the single-player campaign, the title features an expansive squad-based multiplayer experience.
Irrational Games' BioShock Infinite continues to set the stage for the most thrilling offering yet from this hit franchise, which has sold in over 9 million units. Slated for release during calendar 2012, the title will include a number of innovative features, including the recently announced 1999 mode, which will allow players to choose a more challenging experience with permanent consequences from their gameplay decisions. Set in an immense city in the sky, BioShock Infinite promises to take gamers to a new level of action and realism. 2K Games is now slated to offer two separate XCOM releases with unique creative visions. Firaxis Games, the team behind the iconic Sid Meier's Civilization franchise, is now hard at work on XCOM: Enemy Unknown.
Arriving this fall, this action strategy game will allow players to control the operations of a secret paramilitary organization and lead tactical combat missions against a dangerous alien threat. In addition, 2K Marin is continuing to develop their shooter version of XCOM, which combines visceral gunplay with powerful sci-fi abilities as players face a vicious enemy from another world. Also coming from 2K Games in fiscal 2013 is Borderlands 2, the next installment in the critically acclaimed franchise that has sold in over 5 million units worldwide. Developed by Gearbox Software, this shooter-looter will be an experience of epic scale, featuring a story and characters that are larger than life and a world that's as beautiful as it is deadly. Through its action-packed single-player and cooperative multiplayer experiences, Borderlands 2 will continue to define the role-playing shooter genre.
Finally, Grand Theft Auto V is making great progress and promises to continue Rockstar Games' incredible track record of delighting fans by raising the bar in interactive entertainment. We look forward to updating you further on these and many other projects going forward. 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 third quarter and then provide some details around our outlook for the fourth quarter and full-year fiscal 2012. Note that all of the numbers I'll be providing today are non-GAAP results from continuing operations, unless otherwise stated. Our press release provides a reconciliation of our GAAP to non-GAAP measurements. For the third quarter of fiscal 2012, we delivered net revenue of $236.3 million, driven by strong sales, NBA 2K12, catalog titles, digital offerings, L.A. Noire, and our Nickelodeon lineup. This compares to $334.3 million for the third quarter last year, which had benefited from the strong post-launch performance of Red Dead Redemption, the releases of Red Dead Redemption: Undead Nightmare and Grand Theft Auto IV: Complete, and the absence of the NBA lockout that affected sales of NBA 2K12.
Catalog sales accounted for approximately 34% of our revenue during the third quarter, led by Grand Theft Auto franchise, Red Dead Redemption, Midnight Club Los Angeles, and Borderlands. The release of the Red Dead Redemption Game of the Year edition during the quarter was a key contributor to the continuing strong sales of Red Dead Redemption. Digitally delivered content accounted for 11% of our net revenue for the period, led by downloadable add-on content for our key catalog titles and L.A. Noire. As mentioned by Strauss, our most successful digital title was Grand Theft Auto III: 10th Anniversary Edition, which delivered high margins due to the relatively low incremental cost of tailoring the game for the iOS and Android platforms. Gross margin for the third quarter was 47%, up approximately three percentage points year over year.
This increase was primarily driven by lower internal royalties resulting from a change in the mix of revenues and lower-capitalized software amortization due to an increase in revenue from catalog titles. Operating expenses were approximately $79 million for the third quarter, down about $13 million versus the prior year's period, driven by lower selling and marketing and performance-based compensation expense. Selling and marketing expense was higher in the third quarter last year to support the launch of Red Dead Redemption: Undead Nightmare and the post-launch performance of Red Dead Redemption. Interest and other expense increased year over year due to the inclusion of the coupon interest expense for the $250 million of convertible notes that we issued in November. Our strong revenue and margin performance enabled us to deliver non-GAAP net income of $29 million, or $0.27 per share for the third quarter of fiscal 2012.
GAAP income from continuing operations was $14 million, or $0.16 per share. Turning to some key items from our balance sheet as compared to the second quarter, our cash balance increased to $453 million. Our cash receivable balance increased to $53 million, reflecting higher sales during the third quarter. Inventory decreased to $23 million, primarily due to the release of NBA 2K12 in October. Software development costs and licenses increased to $303 million, reflecting the significant development efforts around our pipeline of upcoming releases. Now, I'll review our financial outlook for the full year and fourth quarter of fiscal 2012, which is all provided on a non-GAAP basis. For the full year, we are updating our previous financial outlook. We now expect revenue to range from $790 million to $840 million, and non-GAAP net loss to range from $0.60 to $0.75 per share.
The change to our outlook primarily reflects the impact of Max Payne 3's planned release date moving into fiscal 2013. For the full year, we expect the revenue breakdown from our label to be roughly 45% from Rockstar Games, 22% from 2K Games, 27% from 2K Sports, and 6% from 2K Play. We expect our geographic revenue split to be about 60% North America and 40% international. Excluding our sports business, our geographic split is expected to be approximately 55% North America and 45% international. We expect gross margins in the mid to upper 30%. We expect total operating expenses to remain constant year over year, with higher selling and marketing expense to support our new releases and lower performance-based compensation expense. We project interest and other expense of approximately $10 million, tax expense of about $4 million, and shares of approximately 83 million.
Turning to our outlook for our fourth quarter of fiscal 2012, we expect to deliver revenue ranging from $112 million to $162 million and a non-GAAP net loss ranging from $0.50 to $0.65 per share. The majority of our revenue in the fourth quarter is expected to come from the upcoming releases of The Darkness II and Major League Baseball 2K12, along with ongoing sales of NBA 2K12. We expect fourth quarter gross profit margins in the mid to upper 20s. Total operating expenses for the fourth quarter should increase by approximately 5% year over year, driven by selling and marketing expense to support our fourth quarter of 2012 and first quarter of 2013 releases. Our fourth quarter outlook also reflects interest and other expense of approximately $3 million, tax expense of approximately $1 million, and an estimated share count of approximately 84 million.
Looking ahead, we are incredibly excited about Take-Two Interactive Software's outlook for fiscal 2013 and beyond. As noted earlier, our development pipeline is the strongest in the company's history. We anticipate that fiscal 2013 will be one of the company's best years ever, including substantial revenue growth and non-GAAP net income in excess of $2 per share. With our industry-leading IP, world-class talent, and ample financial resources, Take-Two Interactive Software is well positioned to deliver growth and profitability over the long term. Now, I'll turn the call back to Strauss.
Speaker 1
Thanks, Karl and Lainie. We're pleased with the quarter's results, and we look forward to sharing more progress with you in the coming months. I'd like to thank our colleagues for their dedication and hard work. Together, we're building an ever-stronger Take-Two Interactive Software with a commitment to delivering value to our consumers, business partners, and shareholders. We'll now take your questions. Operator?
Speaker 6
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 Justin Post with Bank of America Merrill Lynch. Please proceed with your question.
Speaker 2
Great. Could you maybe talk about Rockstar Games' ability to get more than one title out in a year? Is that something they've ever been able to do, and something that you could see that could happen at some point? Secondly, I don't know if you've commented on this, but where do you think the long-term margins of this company could be headed once you get past the baseball contract? Do you think you can keep getting them higher as you transition to digital, which has been a big theme for some of the other companies in the space? Thank you.
Speaker 1
Yeah. Hey, Justin, it's Strauss. There definitely have been historical periods where Rockstar Games has put out more than a title in a year. I also remember it's a bit misleading because there's so much other content now that comes along with an initial release. You know, when we put out Red Dead Redemption, it wasn't just about Red Dead Redemption. It was about all kinds of digitally delivered content that came after Red Dead Redemption and kept that title alive and kicking to this very day, right? The initial release was incredibly successful, and now we're up to about 13 million units, I believe, in terms of what's been sold in. That's an extraordinary result, and it's a result because Rockstar Games doesn't just make one title. They make a title with an eye towards continuing to delight consumers with that title going forward.
It's a real view to building franchises. Yes, there's been times when we've had more than one tentpole release in a year, and I think the team is eminently capable of doing that. Equally, the holy grail that we outlined was developing new franchises every year. We've been doing that at least once a year since 2007, and then creating ongoing engagement with consumers that's profitable for the enterprise with add-on content that's largely, but not entirely, digitally delivered. Actually, it turns out we're delivering that to retail as well. I think that that's an extraordinary situation, and it's driven by Rockstar Games' commitment to quality. That does take a lot of time and a lot of resources. In terms of margins, Lainie?
Speaker 3
For the margins going forward without the MLB business, we expect it to definitely come up, and we are happy that the agreement is over, so we'll be able to achieve higher margins. In terms of specific numbers, it would be based on what titles come out in what period. It is very difficult to give a number that we would go after, but we certainly are shooting for a higher margin going forward.
Speaker 1
All right. Thank you.
Speaker 6
Our next question comes from the line of Arvin Bhatia with Stern AG. Please proceed with your question.
Speaker 7
Thank you. I wanted to see if you can help us a little bit more on the fourth quarter. One, I think the guidance seems quite a bit broad given that you're halfway into the quarter or almost one-third at least done. Second, just wondering, as we look at fiscal 2013, can you talk about all the various plans and DLC, et cetera, in your mind that would contribute to digital and what % of your business you think will come, say, in the next 12 to 24 months from digital?
Speaker 3
In terms of your fourth quarter question about the range of the guidance, we still have two new releases that haven't shipped yet for the quarter: Darkness II and Major League Baseball. That performance could vary, which is why we left the range on the larger scale.
Speaker 1
Yeah, and in terms of digitally delivered content, it remains an enormous focus of the company, both in terms of supporting frontline releases and maintaining the life and building the life of the franchise, and equally, catalog distribution. This is a bigger and bigger area of focus for our company. We recently released Grand Theft Auto III: 10th Anniversary Edition for iOS and Android. We continue to roll out iterations of our franchises for any number of platforms with an eye towards bringing our intellectual property to consumers wherever they are, whenever they want it, and through whatever channel interests them. The effect of that is our digitally delivered business has been somewhere between 9% to 25% of our revenue quarter to quarter, depending on what our frontline looks like. What that really tells you, though, is packaged goods still is the lion's share of our business.
Retail is an important partner, but we're ecumenical. We want to give consumers what they want, where they want it. We've already disclosed that the margin difference is not that significant between digitally delivered goods and packaged goods. We're in a way indifferent. The goal here is to meet consumers' needs and delight them and find them where they are.
Speaker 7
Regarding digital, specifically the online projects in Asia, when should we expect to hear a little bit more? I know we've talked about this in the past, but is there anything else you can tell us in terms of the milestones we should be watching for? You mentioned the closed beta testing, good engagement. Are there any metrics to share with us today?
Speaker 1
There obviously are plenty of metrics, and what's good about, what's interesting about that business is you can actually measure it on an ongoing basis. Of course, your consumers guide you after you launch and in many instances before you launch. We're not sharing those metrics publicly. Obviously, we're watching them closely, and we feel pretty good about how it's going. We've also been updating the market and our shareholders every quarter on our progress, and it remains very sound and very encouraging.
Speaker 7
Agreed. Good luck, guys. Thanks.
Speaker 6
Our next question comes from the line of James Heaney with Longbow Research. Please proceed with your question.
Speaker 4
Hi. Thanks for taking my call. A couple of quick questions here on the guidance. When you talked about pushing back Max Payne 3 into next year, you talked about that being a $0.60 to $0.70 impact, although now the new guidance seems to be down more than $0.60 to $0.70 versus your guidance coming out of the second quarter. I guess the question is, are there incremental drags on earnings over and above sort of the Max Payne 3 impact here?
Speaker 3
For Q4, when we gave out the information on Max Payne, that was the information that we knew at the time on that title. We didn't update the full guidance. We said that we would do that on this call. The updated numbers, there was a variety of other factors that are affecting the Q4 numbers. We had some adjustments to our fourth quarter sales forecast based on some current trends and the near-term sales outlook that we were seeing. We also have a more challenging retail environment in Europe as part of that. We have higher expected software development cost amortization in the period, and we have the coupon interest expense on our new convertible notes, as well as a lower share count due to the expected loss position we now have in Q4.
Speaker 4
Great. Very helpful. Just, you know, continue to go down that path, $0.60 to $0.70 of Max Payne getting pushed out of this year and into next, presumably. You were previously targeting that $2 for next year even before the move. Should I be thinking about $2.60 to $2.70 or ultimately did some other titles fall out of 2013 and maybe go into 2014?
Speaker 1
Yeah, we gave that figure some time ago in an effort to be transparent about the robust year we had ahead of ourselves. We have some titles that remain unannounced for the year. We have a very robust lineup, but we don't intend to adjust that figure regularly on a prospective basis. We'll guide as we normally do at this point.
Speaker 4
Okay. Great. Thanks, guys.
Speaker 6
Our next question comes from the line of Eric Handler with MKM Partners. Please proceed with your question.
Speaker 7
Yes. Good afternoon. Just curious, you know, on the statement that you've talked about before, being physical margins being comparable to digital margins, can you sort of walk through the puts and takes of how that is given you don't have the packaging with digital? I would just think that it doesn't take a lot more to do some downloadable content in terms of the cost to create that. What's the reason why they're comparable margins?
Speaker 1
Your margins interact with your selling price as well as your cost profile. In the case of your physical goods, you have your cost of goods sold, and you're obviously familiar with what that is. With regard to digital goods, you're right. You don't have certain physical costs, but you do have marketing partners with whom you share, and you may have a different frontline price point. The effect is that % may bump around, but the dollar margins per unit are pretty similar.
Speaker 7
Got it. Thank you.
Speaker 6
Our next question comes from the line of Michael Hickey with National Island Alliance. Please proceed with your question.
Speaker 2
Hey, guys. Great job on your quarter. Just another question on your fiscal 2013 guidance of plus $2 per share. I understand you don't want to update that, but are the inputs the same, I mean, game-wise, or can we at least get clarification that the games that you were modeling for fiscal 2013 originally are the same plus Max now?
Speaker 3
Mike, when we gave that information out, we said we'd be above $2. It was like nine months ago, I think, at this point. Things definitely move around, but we still maintain that we'll be over $2 in that period.
Speaker 2
Okay. Apple's creating a lot of buzz that they may go into the TV market at the end of this year, maybe early 2013, and clearly, they've been disruptive to other markets. I'm just curious, Strauss, how you see a potential Apple TV, how that's going to impact your business, and maybe how you can benefit from it?
Speaker 1
That's a good question. I mean, if you believe that everything's going to be connected and the processing power continues to grow, if you believe in Moore's Law, as I do, and people who don't have been disabused of the notion, then a TV that delivers the kind of quality experience Apple's delivered to other product lines could be a very interesting added benefit for gamers at home. Until I see the product and what it's meant to do, it's very hard to opine.
Speaker 2
Okay. If that's not disruptive enough, it looks like obviously we have Nintendo having a next-gen platform this year. It looks like Microsoft is heavily rumored 2013, 2014. Can you just walk us through how you manage your IP and your resources into another next-gen cycle?
Speaker 1
It's a great question, Mike. As you're aware, when these platform transitions occur, the strong become stronger and the weak go away because what happens, of course, is your software acquisition curve declines as the new platforms are announced and the old platforms are coming to the end of their growth period. Of course, they don't go away. We still sell products that were launched a long time ago, and we still sell physical goods for those products. You do see a decline in the tie ratio as the new platforms are announced and as they come out. Platforms obviously have low install bases in the beginning, obviously. We have to be very thoughtful about how we manage our portfolio, and we and our competitors all are thinking about it. It's a little premature because it's early days yet, but it is something that we're being very thoughtful about.
I will say this, from a financial position, the company's never been in better shape to invest. From an intellectual property position, the company's never had more franchises or more important franchises than we have now. Between the two, then add the most important thing, which is we believe we have the very best development talent in the business, bar none. It's largely internal talent, which is to say that we have the ability to talk to our colleagues and all get on the same page about what we want to develop, and then we have the ability to go do it. No one needs to ask anyone's permission. We don't need to find external resources to pursue that. We have a habit of making the highest quality products in the business. We think we're as well positioned as anyone could be.
You are right, however, that these transitions create challenges and opportunities.
Speaker 7
Okay, guys. Thank you. Good luck.
Speaker 6
Our next question comes from the line of Ben Schachter with Macquarie. Please proceed with your question.
Speaker 2
Strauss, you've been somewhat outspoken on the whole social gaming issue, and now there's a lot more data out there with Zynga being public and Facebook having their data last night. Given all the new details, I just wonder if you had any updated thoughts on how social gaming may evolve and how it may impact Take-Two. I have a couple of follow-ups.
Speaker 1
Yeah, we still believe it's potentially an opportunity. We put out Civilization for Facebook, got great ratings on it, and had a great learning experience. It wasn't an especially costly endeavor, and we continue to be exceedingly focused on what social gaming can mean for Take-Two Interactive Software. We do have to be true to our DNA. We make robust products. We make the highest quality products in the business, and we aim to delight consumers with everything we do. Both can be true. There can be a big social gaming market, and there can be companies out there that are doing a terrific job attacking the market. Equally, there's a very significant market for what we and many of our competitors do in terms of more robust experiences. As I said earlier, we endeavor to do all of the above.
When we say we endeavor to do all the above, we are doing so judiciously with an eye towards how much we're investing and making sure that everything we do is based on the passion of our development teams and a desire to delight consumers. In terms of the metrics that are going on, it is pretty extraordinary and something to admire that in a very short period of time, Mark Zuckerberg and his team at Facebook will be launching an IPO that's rumored to be $75 billion to $100 billion offerings. I read today that they're reporting about over $8 billion, about $3.5 billion in revenue, about $1 billion in profits. They do all that with a couple thousand employees, and how can you not admire that?
Speaker 7
Just separately on some of the Asia issues, beyond China, are there other markets in Asia that are interesting for you, and how have some of those other markets, Japan and some other areas, changed over the last few years?
Speaker 3
I think all of the, it's just Karl, all of the markets in Asia are potentially interesting to us. Some are more developed than others. Some are more developed in packaged goods than others. I think in terms of most of the Southeast Asian markets, we do have a robust packaged goods business, which is growing, but that's obviously where we focus the bulk of our online activities. You know, Japan is also very, my perspective, but that's really more of a mobile market. It really does depend from a market-by-market basis. It remains to be seen whether some of the other markets like India can evolve and present an opportunity for us. I happen to believe that they can. Again, time will tell, and I think that those markets need to evolve a bit more.
Speaker 7
Great. Good luck, guys.
Speaker 6
Our next question comes from the line of Daniel Ernst with Hudson Square Research. Please proceed with your question.
Speaker 2
Yes, David, thanks for taking the call. Two questions, if I might. First, on the iOS experience that you're having and with the success of Grand Theft Auto III, and Lainie, you mentioned that it was a very high-margin product for you, given that it was relatively painless to port the product over to iOS. Is that platform now, given that success, able to support a round-up launch? Could you take a AAA Rockstar Games title, build it from the ground up for iOS, and have a financial success? Are the economics compelling enough at this point to sort of develop originally a AAA title like that for iOS? Second question on baseball with the contract over and that going from being a drag on earnings to being neutral.
Is there an opportunity, given that you have the engine built and great ratings in that game and experience in selling in that market, to turn that into a new contract that is profit share rather than the big upfront payments that have caused it to be so painful in the past? Thanks.
Speaker 3
Hi, Daniel. It's Karl. In terms of iOS, I think your question was really, can we do a AAA product from the ground up on iOS? I think it really depends on what your definition of AAA is. There is still a limitation in terms of technical capabilities and processing power on the iOS. Can you put out an experience that is equivalent to something you would put on one of the more advanced consoles or a PC? The answer is no. You can't do that yet. Will there be a day when that happens? Obviously, then it's just a question of, is there a convergence between the iOS operating system and the other ones as they evolve? Honestly, I can't answer that question, but time will tell.
Obviously, we can't do something as in-depth as one of our big AAA games on the iOS system today from the ground up. That being said, we have and we are pursuing things, development from the ground up. We're not just interested in iOS and Android as a port outlet for us. We are endeavoring to build things from the ground up on iOS and the Android systems that actually do present more robust experiences. We're not the only one. There are others that are going after that as well. In terms of MLB, look, I mean, we've had, I think we have a great baseball game. We have a great engine. Obviously, we have assets there. Whether there's a deal to be done, that remains to be seen.
Speaker 2
Perfect. Thanks for the cover.
Speaker 6
Our next question comes from the line of Brian Fitzgerald with UBS. Please proceed with your question.
Speaker 7
Thanks. Lainie, you mentioned softness in Europe, and last night, one of your competitors mentioned that financial concerns at a key UK retail partner could impact revenues next quarter. Is that what you're seeing? Is it localized more towards the UK, or is it maybe broader in terms of EU? Should we anticipate ongoing international pressure there going forward? I have one follow-up on some of the digital stuff.
Speaker 3
On the retailer in Europe, you know, we're not going to really comment specifically on who it is or what the issues are there. Overall, I think that the business in Europe for us is pretty strong, and we certainly are going to be affected if one or more of our retailers are having issues over in Europe.
Speaker 7
Okay. On the digital side, do you see any differentiation relative to your performance of titles on iOS versus Android, and maybe in terms of your distribution channels, Origin versus Valve? Thanks.
Speaker 1
We don't really give out that level of detail. I will say it's still a work in progress. Obviously, one of the concerns that an AAA developer has and publisher has is the price point of those platforms. That is a concern. I think we do deliver these AAA experiences, and consumers are accustomed to an exceedingly low price point.
Speaker 3
To be clear, we're actually not on Origin at this point.
Speaker 7
Great. Thanks, guys.
Speaker 6
Our next question comes from the line of Doug Creutz with Cowen & Company. Please proceed with your question.
Speaker 7
Thanks. You guys have a lot of AAA products scheduled for the upcoming year. I think probably 2X more than you've ever shipped in a single year. I'm just wondering, do you have any concern about cannibalization between the products, your ability to support all those products with launches independently, the marketing dollars, et cetera, and how you're thinking about that? Thanks.
Speaker 1
It's a good question. I mean, the thing about cannibalization in entertainment is, remember, unlike, say, the toothpaste business, in the entertainment business, you never need entertainment. When people ask about competitors, in a way, we compete with all forms of entertainment. In a way, we don't compete at all because when you give consumers something that they really, really want, they come out for it. That said, we found out post the worldwide financial crisis, in a way, the consumers were more selective with their dollars, and that put a finer point on our need and desire to put out only the highest quality products. In a way, even if we have a tighter release schedule, we don't really compete because it's not as though our franchises look alike or sound alike or play alike. All that said, there's a matter of focus.
We have a limited number of individuals around here, and we do want to make sure that when we're spending a lot of money to make a AAA product and a lot of money to market it, the entire organization can focus. We try to schedule accordingly. We try to be mindful of what our competitors are doing as well. I think our competitors have found it wise to be mindful of what we're doing. The answer is, yeah, it's a high-class problem, but we do have to be somewhat careful not to step on releases. I think we are. I think one of the ways we've done it is we're kind of a market leader in saying, actually, there is another season besides the Christmas holiday season, that we can be really successful throughout the rest of the year with the possible exception of July.
We tend to focus on a worldwide release schedule that covers virtually every month of the year. To answer your question, I think we do have sufficient room in the calendar to be effective without stepping on our products.
Speaker 7
Okay, thank you.
Speaker 6
Our next question comes from the line of Edward Williams with BMO Capital Markets. Please proceed with your question.
Speaker 7
Good afternoon. Just a couple of questions looking at platforms. Can you comment a little bit about your thoughts with regards to the upcoming launch of PS Vita and how you see the handheld relative to iOS and your level of support there? Obviously, handheld has been big for you in the past, what your thought is there. As a follow-up to that, can you talk a little bit about how you're prioritizing your development resources between digital versus physical and then across the various consoles as we look into the current year?
Speaker 3
Hey, and it's Karl. In terms of the Vita, we have not announced any specific support for Vita. Although Ken Levine did actually speak of the Vita in the context of BioShock at one point, we have not actually announced anything specific related to that. That being said, we've had a long history with Sony and their handheld devices and have done very well together over the past. We are looking forward to the Vita coming out in the Western markets. It's obviously something that we're giving great consideration to on a go-forward basis. In terms of, I think your second part of that question was something about competing with how the Vita holds up versus other handheld opportunities and specifically iOS.
Just by the fact that Vita is a mobile device and a lot of the iOS devices are mobile devices as well, by definition, they could be construed as competitive. I think that they are different platforms, and there's different technical capabilities between the two platforms. Are they competitive? To the extent that you're only going to have one mobile device, which, by the way, all of us don't, we all have multiple mobile devices, then they will be directly competitive. Again, that'll shake out in the market. Can you just repeat your second question? It was something it was about.
Speaker 7
Yeah, what I was curious about is, as you're looking at allocating your development budget across different platforms, can you just comment a little bit about how you're prioritizing the decision to focus on digital versus the decision to focus on physical or the decision to focus on the 360 versus PS3 or the Wii U? Just how you kind of characterize that budgeting process or how you're going about it.
Speaker 3
Yeah, I can't really go into a great amount of detail about it, but I'll give you philosophically how we look at this. In terms of amongst different consoles, et cetera, we look at what platforms in general that are relevant, and we develop for those platforms. It behooves us to have our content, to the extent that that platform can handle our content and the experience we want to deliver, to be on all of the platforms that are relevant to the consumer. All the console platforms are relevant, and obviously, we've developed across the board in that context. In terms of digital versus physical, we actually don't really look at our development budgets that way at all because in a lot of ways, it's all zeros and ones. It's the same content. Whether it's delivered digitally or physically, it's the same stuff.
The digital opportunity is really more a function of how it's delivered ultimately and not necessarily something that we're looking at separately in the development context. Now, online games, which is a separate component of the quote "digital business," that is a separate consideration. As Strauss said before, we're very aggressive in our online strategy, and we've got three projects that we've announced going on in Asia at this point. Each of them has their own separate development budget that we manage internally.
Speaker 7
Okay. Great. Thank you.
Speaker 6
Our next question comes from the line of Colin Sebastian with Robert W. Baird. Please proceed with your question.
Speaker 7
Yeah, hi. This is Greg O'Shaurin for Colin. I wanted to dig in a little more into the iOS and the Android contribution this quarter. It looks like last year there was a 0% contribution, and I assume that this is in the other category, and that was 3% this quarter, which looks like a nice contribution in terms of growth. Could you give us any further insight in terms of how that broke down between Android and iOS? You had some positive things to say about Android, and sort of the general perception is that most of the gaming money is to be made on iOS. Are you seeing anything different there?
Speaker 1
Yeah, we're probably not going to break down the information much further, especially because it's early days yet.
Speaker 7
Right. Regarding the latter part of my question, are you seeing anything different in terms of the general perception that most of the gaming opportunity is really just on iOS? Are you seeing more, are you seeing a similar opportunity for Android?
Speaker 1
I don't see it that way. I think that Apple has a great advantage because they brought out this perfect tablet, and it's done incredibly well. I think there are plenty of Android opportunities as well. There's plenty to go around in any case. There are billions of people with mobile platforms, and I believe tablets will be ubiquitous. That's why we are in the market and why we need to be there. We have plenty of choices we actually have to really debate and focus on because we have to make them. This isn't a choice we have to make. We can do both.
Speaker 3
Right. Because Grand Theft Auto III: 10th Anniversary Edition was on iOS and Android.
Speaker 1
Precisely.
Speaker 7
Right. Okay. Finally, regarding the tablet opportunity versus smartphones, do you see, is anything significantly different there in terms of opportunity? Do you think you ultimately see the tablets becoming more important than the smartphones?
Speaker 1
They're going to change because tablets, as Karl just referenced, if you believe in Moore's Law and we're pretty early with tablets, eventually, you have to believe the processing power of tablets is going to grow substantially. In any case, the screen size is bigger. Even if the processing power of a smartphone equals that of a PC, you're still burdened by a screen size issue. In terms of the kind of experiences we love to focus on, which is a very robust experience, I think the tablet's going to be a more interesting platform for us. However, people have proven that you can do really well with games on a small platform as well. As I said, we do have to consider price points because we develop these very high-quality products, and we are not unmindful of the need to charge an appropriate price for those products.
Speaker 7
Right. Okay. That obviously is considering that we're taking into account that tablet distribution is probably never going to be the equivalent of smartphones, just given the different market sizes.
Speaker 1
It remains to be seen, but I wouldn't actually agree with that. I think tablets are going to be ubiquitous.
Speaker 7
Right. I mean, mobile devices are still on the order of $1.6 billion. If they were old smartphones at one point, wouldn't you agree it's a little difficult to imagine $1.6 billion tablet units?
Speaker 1
No, I don't believe it is. I'm a big believer that tablets will be ubiquitous.
Speaker 7
All right, thank you.
Speaker 6
Our next question comes from the line of Atul Bhaga with Lazard. Please proceed with your question.
Speaker 7
Hey, guys. Thanks for taking my question. Just a quick one on your potential use of cash. Can you help us specifically walk us through your acquisition strategy? What segments you might be looking at, what sizes? Is this something which is on your radar right now? Thank you.
Speaker 1
Yeah, I mean, the good news about our cash balance is it allows us to consider opportunities that perhaps we couldn't have considered in the past. We are in growth mode around here, and we're investing behind our development teams, we're investing in our marketing teams, we're investing in our franchises, and we're investing in the footprint of our distribution, which is reflected in the % of our revenues that comes from outside the United States, which has grown materially since 2007. We like to be in a position of being able to consider opportunities as they come up. One of the reasons we're able to is, frankly, the cost of capital is much lower today than it was years ago for this sort of capital.
While it is a drag on our per-share results, it's not anywhere near as much of a drag as it might have been just a couple of years ago. All that said, what we've done so far from an M&A point of view is we've been exceedingly disciplined. We're focused on value, and when we have done an acquisition, we've acquired intellectual property as well as a team that we felt both would advantage ourselves in our core business. I don't think you'll see that thinking change. What we're not going to do is roll the dice on behalf of our shareholders and take a flyer and see what happens and then announce a write-off if it goes against us.
I think you can assume that we take being fiduciaries of capital exceedingly seriously, and if we do make an acquisition, large or small, it'll be consistent with the strategy we've outlined. It'll be heavily focused on being accretive as quickly as possible, and it'll be value-oriented.
Speaker 7
Just to be clear, Strauss, you had mentioned early on that margins between digital and packaged goods business, we see kind of a similar margin. In terms of a priority, you're still seeing strong opportunity on the packaged goods side. Is it fair to say that when you're looking at acquisition, it could be across the board, whether digital or packaged goods?
Speaker 1
As Karl said, everything we do is digital. Now we're just arguing about how you get it to consumers. We're indifferent. We want to be expert in getting our products to consumers wherever they are, however they want it, whatever channel they want. Frankly, we want to be flexible in how they pay for it as well. In order to do that, you need to avail yourselves of all different forms of digital as well as packaged goods distribution. There is nothing technically that prevents us from distributing a AAA console title digitally, right? We do so. I can't imagine making a deal that would somehow make a decision among the camps because this isn't a fight. The answer is all of the above.
Speaker 7
Perfect. Thank you.
Speaker 6
Our next question comes from the line of Mike Olson with Piper Jaffray. Please proceed with your question.
Speaker 7
Hey, good afternoon. I just had one quick one. How do you guys think about kind of DLC delivery and annual subscriptions going forward? Do you expect or should we expect that you will institute a DLC membership service for any of your larger franchises going forward?
Speaker 3
It's Karl, Mike. In terms of DLC, obviously right now, most of our DLC distribution is done on a sort of one-off basis in terms of you pay a price and then you own the DLC. There are a whole host of other business models that you can consider in the context of electronically distributed content. Those are in the form of potential subscriptions. There are lots of variations on those. There's also microtransactions, free-to-play with microtransactions. There's also lower priced models plus microtransactions. The iterations are almost endless.
At the end of the day, we look at those types of evolutions as an opportunity to really be able to maximize our relationship and ultimately our financial relationship with the consumer to give them content the way they want the content, where they want the content, give it to them in the way they want to buy the content so that they can engage more fully. In a dynamic world where the more you get paid, the more deeper consumers engage with your content, I can tell you that we feel we are very well positioned because in our products, consumers do engage deeply. We offer a lot of value in our products.
In a world where everything doesn't cost $59, and it really, I don't want to say price discrimination, but there's potential price differences depending on how much content you actually and value deliver to the consumer, we will fare very well.
Speaker 7
All right, thanks very much.
Speaker 6
Our next question is a follow-up question from Justin Post with Bank of America Merrill Lynch. Please proceed with your question.
Speaker 2
Thank you. I was asking about the convertible note and why you did it, but you already answered that. Thank you.
Speaker 6
We have no further questions in queue at this time. I would now like to turn the floor back over to management for closing comments.
Speaker 1
Thank you so much for joining us. We're gratified with the quarter's results. We're very excited about our upcoming releases, and we very much appreciate your support.
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.