Take-Two Interactive Software - Earnings Call - Q4 2011

Transcript

Speaker 1

Greetings and welcome to the Take-Two Interactive Software's fiscal fourth quarter 2011 results. At this time, all participants are in a listen-only mode. A 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 4

Good afternoon. Welcome and thank you for joining Take-Two Interactive Software's conference call to discuss its results for the fourth quarter and fiscal year ended March 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 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 Transition Report on Form 10-KT for the five-month transition period ended March 31, 2010. 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 and thank you for joining us today. Fiscal 2011 was a terrific year for Take-Two Interactive Software, one in which we generated substantial revenue growth and earnings, while at the same time positioning the company for even greater success over the long term. We've now exceeded our revenue and earnings guidance for six quarters in a row. These results have been achieved through the execution of our strategy, the core of which is to produce and distribute a select number of AAA titles and support them with add-on digital content delivered both on disc and digitally. We're particularly pleased to be profitable even in a year without a major new release of Grand Theft Auto. In the past fiscal year, we grew net revenue by 49% to $1.14 billion and delivered non-GAAP earnings of $1.02 per share. Our strong earnings converted into even stronger cash flow.

As a result, we ended the period with $280 million in cash, almost double last year's level, and we have ample borrowing capacity on our undrawn credit facility. The most significant contributors to our better-than-expected results for the year were the breakout successes of Rockstar Games' Western-themed epic Red Dead Redemption and 2K Sports' best-selling basketball simulation game, NBA 2K11. Our results were also enhanced by an array of other new releases and catalog offerings, including Mafia II, Sid Meier’s Civilization V, titles from our Grand Theft Auto franchise and Top Spin 4, as well as our growing list of digital offerings. Red Dead Redemption has become one of the best-selling franchises in the history of Rockstar Games.

The title has sold in more than 8.5 million units since its launch last May, and it's been supported by several highly successful releases of downloadable and add-on digital content, including the highly successful Red Dead Redemption: Undead Nightmare. It received over 160 Game of the Year awards and is among the top five highest-rated titles of all time for the Xbox 360 and PS3, with an average Metacritic rating of 95. I'd like to congratulate the team at Rockstar Games on the tremendous success of this franchise. NBA 2K11 has sold in over 5 million units since its launch, and it's become the best-selling title in the history of both our basketball franchise and 2K Sports. I'd like to thank everyone at 2K Sports and Visual Concepts for delivering a stellar title that received numerous Sports Game of the Year awards.

We recently extended our long-term partnership with the NBA to develop and publish this franchise, so gamers can look forward to new versions of NBA 2K for many years to come. Digitally delivered offerings are an increasingly important part of our business, representing $102 million in revenue in fiscal 2011. We released many successful downloadable content packs for titles including Red Dead Redemption, Borderlands, Grand Theft Auto IV, Sid Meier’s Civilization V, and Mafia II. Add-on content generally produces incremental revenue and profits and keeps gamers engaged with our titles for longer periods of time, thereby extending the life of the product, increasing the value of the brand, and ultimately converting it into a franchise. We believe that add-on content also has a positive effect on reducing trade-ins and used game sales.

One of our key long-term initiatives is to reach new audiences by delivering our AAA entertainment experiences through emerging online platforms. These include massively multiplayer online games and social games. As Karl will discuss in more detail, we currently have several projects underway, which are structured to maximize potential upside while minimizing our risk. We're very excited about the opportunity to generate significant revenue and earnings in the future. We believe the key to our success has been and will continue to be our creative team's ability to produce consistently AAA titles that set new standards for innovation and quality. We've proven that our creative teams are the best in the business. For example, Rockstar Games' L.A. Noire has garnered numerous great scores and has become a major contender for Game of the Year honors.

This highly cinematic game introduces a whole new realm of narrative expression, interactivity, immersion, and reality to the interactive entertainment industry. In addition, our original BioShock title, developed by 2K's Irrational Games Studio, was recently selected for inclusion in the Smithsonian American Art Museum's The Art of Video Games exhibit that will be on display in Washington, DC, in 2012. This past February, Take-Two Interactive Software was recognized by Metacritic as publishing the highest quality games in the industry based on the ratings of our titles released in calendar 2010, and we're already off to a great start in 2011. A key element of our high-quality approach is our continued ability to make Take-Two Interactive Software the home for the best creative talent in our industry. To that end, we're very pleased to have extended the employment agreements with Rockstar's key creative talent.

I want to take a moment to recognize this team, which has been with Take-Two for well over 10 years now. They've not only continued to deliver outstanding results, but they've shown incredible loyalty. We look forward to working with the Rockstar team for many years to come. Today, creating a blockbuster hit takes more than superb production values. It takes global marketing coordination that leverages every form of media, integrated promotions with our key retail partners that make our launches tentpole events for their stores and consumers, and worldwide distribution that ensures our products are on shelves when promised. In the same way that we're committed to creative excellence, we're committed to giving our title the optimal conditions for success in the market.

Turning to our outlook for fiscal 2012, we expect the scale and diversity of our portfolio of AAA franchises to enable us to deliver on our goal of consistent profitability. We have an exciting lineup of announced new releases that Karl will highlight, many of which we believe have the potential to be breakout hits. These include unique, cutting-edge titles such as L.A. Noire, the return of long-awaited industry icons like Duke Nukem, and a broad array of other offerings that promise to delight audiences around the world. While we're highly optimistic about our recent and upcoming releases, it's still very early in the year. Therefore, our initial guidance for fiscal 2012 does not assume that any of our releases will be a breakout hit like Red Dead Redemption.

I'd note that we have a history of exceeding our guidance when our titles do become blockbusters, as we did last year due to the tremendous success of Red Dead Redemption and NBA 2K11. Looking ahead to fiscal 2013, we have one of the strongest development pipelines in Take-Two's history. While it's still very early to be discussing our fiscal 2013 outlooks, we currently expect to deliver substantial revenue, earnings growth, and non-GAAP earnings in excess of $2 per share. I'm very proud of our company's achievements throughout the past year, which illustrate our entire organization's commitment to executing on our strategy and establishing a sound foundation for Take-Two's long-term success. From a product standpoint, I believe we have the best creative team and intellectual property in our industry.

From a business standpoint, our solid balance sheet gives us the flexibility and strength to take the right strategic steps to generate growing profits and returns for our shareholders over the long term. I'll now turn the call over to Karl.

Speaker 3

Thanks, Strauss. Fiscal 2011 was a terrific year for Take-Two. I'd like to join Strauss in congratulating the creative teams at Rockstar Games and 2K, as well as everyone else at Take-Two for delivering these results. I'll begin by reviewing our exciting lineup of releases for fiscal 2012. Our first release for the new fiscal year was Carnival Games: Monkey See, Monkey Do!, which launched on April 5. Developed and published by 2K Play, the family-oriented game builds on our highly successful Carnival Games franchise and is our first title specifically designed for Kinect for Xbox 360. On May 17, Rockstar Games launched the highly anticipated L.A. Noire, which has transcended the traditional boundaries of video games by creating an entirely new genre of interactive entertainment. Set in post-World War II Los Angeles, L.A.

Noire is a dark and captivating crime thriller that artistically blends action and detective work with a cinematic film noir backdrop. Supported by an outstanding and innovative global marketing campaign, L.A. Noire has already generated a fantastic response from press and fans alike. On June 10 internationally and June 14 in North America, Duke Nukem will make his triumphant return as gaming's most irreverent hero. Developed by Gearbox and published by 2K Games, Duke Nukem Forever delivers an action-driven laugh-out-loud good time. Just this morning, we announced that the game, once considered vaporware by many, has gone gold and will become a reality in a matter of days. This summer, 2K Play plans to launch Nicktoons MLB, a whimsical take on America's favorite pastime that pits characters from Nickelodeon's Nicktoons against players from all 30 Major League Baseball teams.

This game will be our second to feature support for Kinect and will also be available for the Wii and Nintendo DS. On October 4, 2K Games plans to release The Darkness II. Inspired by the supernatural comic book series, The Darkness II breaks from a sea of conventional first-person shooters with its quad-wielding combat action and takes players down a brutal path as the overlord of an ancient and ruthless force of chaos and destruction. Also slated for release in fiscal 2012 are the mid-20th century action thriller XCOM and the 2012 versions of our popular sports titles NBA 2K and MLB 2K. 2K Sports once again does not plan to release an NHL title for consoles this year. As previously announced, BioShock Infinite, the next title in the 8 million unit selling franchise, will be released in calendar year 2012.

Currently in development at Irrational Games, BioShock Infinite introduces an entirely new narrative and gameplay experience that lifts players out of the familiar confines of Rapture and rockets them to 1912 Columbia, an immense city in the sky. If response from last week's E3 preview event in Los Angeles provides any indication of what gamers can expect, BioShock Infinite promises to bring interactive entertainment to an all-new height. You'll be able to see this and many of our upcoming releases from 2K on display during E3 from June 7 through June 9. At this time, we're also updating our previously announced release schedule to reflect our expectation that Spec Ops: The Line will now ship in the first half of fiscal 2013. At this point, I'd like to turn topics and briefly discuss some of our current online initiatives.

At the core of Take-Two Interactive Software's overall strategy is the fundamental belief that maximum value is achieved through the creation of robust entertainment franchises. We strongly believe that Take-Two Interactive Software's competitive advantage is our ability to produce groundbreaking intellectual property that is truly differentiated in the marketplace. Take-Two Interactive Software's approach to the online space is consistent with this philosophy and will employ the same focus and dedication to quality in managing online gaming initiatives as we do with our core console business. Take-Two Interactive Software's online strategy focuses on content development while remaining platform agnostic. Simply put, we will develop for all viable online gaming platforms that are capable of supporting highly compelling entertainment experiences.

Online platforms that are more conducive to short session casual gameplay also present opportunities for Take-Two Interactive Software, but more specifically as a means to broaden and enhance audience engagement with our AAA franchises. To date, Take-Two Interactive Software's online gaming initiatives have followed one of two paths: partnering with best-in-class online publishers or selectively investing in internal development projects. We believe this approach will create significant economic opportunity for Take-Two Interactive Software while we maintain our proclivity for prudent deployment of capital. In Asia, we have now announced partnerships with three of the world's most successful and highly acclaimed online developers and publishers. In 2009, we announced our partnership with Tencent to co-develop an online version of NBA 2K for distribution in China and other key markets.

In addition, we recently announced our partnership with Nexon to develop and publish an online baseball simulation game for the South Korean market. Just yesterday, we announced our partnership with XL Games to develop a massively multiplayer online game for the Asian market based on one of 2K's top-selling franchises. These partnerships are exciting not only because they provide Take-Two with access to a large and growing online market, but also because each represents a unique collaboration of development teams that are recognized leaders in their respective fields. In North America, we are now in closed beta testing with Civilization World for Facebook, a social gaming version of our top-selling strategy franchise. While still early, initial feedback is very promising.

In a recent preview, IDN said Civ World redefines what's possible on Facebook and that Civ World already feels like the best game on Facebook based on five days of playing in the current alpha version. An open beta is planned for Civ World this summer. These projects are each examples of how we're pursuing emerging opportunities by leading with our content. Take-Two will pursue these and other online initiatives while we continue to execute our core strategy of delivering AAA games for consoles. 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 fourth quarter and fiscal year 2011 and then provide some details around our outlook for the fourth quarter and fiscal year 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 to GAAP numbers. For fiscal year 2011, net revenue increased 49% year over year to $1.14 billion. A significant increase was driven primarily by the strong performances of Red Dead Redemption and NBA 2K11. Other key titles contributing to the increase in revenue were Mafia II, Grand Theft Auto: Episodes from Liberty City, Red Dead Redemption: Undead Nightmare, Sid Meier’s Civilization V, Grand Theft Auto IV: Complete, and Top Spin 4.

Revenue from digitally delivered content grew year over year to $102 million, driven by strong sales of offerings for Red Dead Redemption, the Grand Theft Auto franchise, Borderlands, and the Sid Meier's Civilization franchise. Our gross margin for the year was 40.3%. The improvement over last year was due to a greater percentage of our revenue coming from internally developed titles this year. Non-GAAP net income rose to $94.3 million, or $1.02 per share, as compared to a non-GAAP net loss of $65.9 million, or $0.85 per share last year. On a GAAP basis, we generated income from continuing operations of $53.8 million, or $0.62 per share. Our earnings exceeded the high end of our guidance range, primarily due to the better-than-expected performance of NBA 2K11, Grand Theft Auto IV: Complete, digitally delivered content, and several catalog titles.

In addition, we benefited from operating expenses that were slightly lower than expected due to the timing of marketing spend for certain titles, partially offset by higher performance-based incentive compensation. In addition, tax expense was lower than forecast in our foreign territories. Moving on to the fourth quarter, net revenue was better than expected, $182 million, compared with $233 million a year ago. As expected, year over year comparisons were lower due to the release of BioShock 2 in the prior year's fourth quarter. The largest contributors to revenue in the fiscal fourth quarter were NBA 2K11, Top Spin 4, Major League Baseball 2K11, Red Dead Redemption, Red Dead Redemption: Undead Nightmare, Grand Theft Auto IV: Complete, and Borderlands. Digitally delivered content accounted for $27 million, or 15% of our fourth quarter's net revenue. Our gross margin for the quarter was 35%, roughly unchanged year over year.

Operating expenses were approximately $77 million, in line with last year's fourth quarter. More specifically, selling and marketing expenses decreased by $8 million, primarily due to marketing support for the quarter 2010 release of BioShock 2. General and administrative expenses increased by $5 million as a result of higher performance-based incentive compensation, higher IT expenses as a result of the relocation of a data center, and non-recurring credits for bad debt expense in the prior year's fourth quarter. R&D increased by $3 million due to higher production expenses and lower capitalization rates. Depreciation and amortization was flat compared to last year. Moving down the income statement, interest and other expense decreased by $2 million. We realized a $0.6 million foreign exchange gain in the quarter compared to a $0.9 million loss in the fourth quarter of fiscal year 2010 and earned greater interest income on higher cash balances.

Our strong revenue performance drove a better-than-expected fourth quarter non-GAAP net loss of $14.4 million, or $0.18 per share, as compared to non-GAAP net income of $3 million, or $0.04 per share last year. Our GAAP loss from continuing operations was $22.4 million, or $0.27 per share. Moving on to our cash flow and balance sheet, for the full year, our strong profits translated into increased cash provided by operations of $135 million, and as a result, we ended the year with a cash balance of $280 million. Our cash receivable balance was $84 million at March 31, reflecting the releases of Top Spin 4 and Major League Baseball 2K11 towards the end of the fiscal year. Inventory at March 31 was approximately $25 million, flat compared to last year.

Software development costs and licenses of $270 million reflect the significant development efforts around our AAA fiscal 2012 and beyond releases. Now for our outlook with all provided on a non-GAAP basis. For the fiscal year 2012, we expect revenue to range from $1 billion to $1.1 billion and non-GAAP earnings per share to range from $0.10 to $0.35. We expect the revenue breakdown from our label to be roughly 42% from Rockstar Games, 32% from 2K Games, 20% from 2K Sports, and 6% from 2K Play. We expect our geographic revenue split to be about 65% North America and 35% international. Excluding our sports business, our geographic split is expected to be approximately 60% North America and 40% international. Gross margins for fiscal 2012 are expected to be in the high 30s. Now to our operating expenses.

Overall operating expenses should increase by approximately 13% as compared to fiscal 2011, primarily due to higher selling and marketing expense. As a percentage of sales, we expect selling and marketing expense to increase by approximately five percentage points, driven by planned, robust marketing campaigns to support our future product releases. We expect general and administrative expense to increase by approximately 5% as compared to the prior year due to increased rent and a non-recurring credit from a legal settlement which benefited fiscal year 2011. R&D expense is expected to increase by about 4%, primarily due to additional staffing at our studios to support our release schedule. Finally, depreciation and amortization should decrease by approximately 5%.

Our fiscal year 2012 guidance reflects interest and other expense of approximately $8.5 million, tax expense of about $9 million, primarily attributable to our international operations, and an estimated diluted share count of approximately 90 million, which includes 5 million of participating shares for unvested restricted stock grants. We are also providing guidance today for the first quarter of fiscal 2012. We expect revenue to range from $325 million to $375 million and non-GAAP income per share to range from $0.00 to $0.10. The majority of our revenue in the first quarter is expected from L.A. Noire and Duke Nukem Forever. We expect first quarter gross profit margins in the mid-30s. Overall operating expenses should increase in the first quarter by approximately 30% year over year, primarily driven by an expected 48% increase in selling and marketing expenses to support our launches of L.A. Noire and Duke Nukem Forever.

General and administrative expenses are expected to increase by approximately 19%, primarily due to a non-recurring credit from a legal settlement which benefited the first quarter of fiscal 2011, as well as higher rent and IT expenses. R&D is expected to be down by about 3%, primarily due to higher capitalization rates and depreciation and amortization expense is expected to decrease by about 13%. Our first quarter guidance reflects forecasted interest and other expense of approximately $2 million, tax expense of about $2.3 million, and an estimated share count of approximately 88 million, which includes 5 million of participating shares for unvested restricted stock grants. I will now review the timing of future releases that we have assumed in our guidance for fiscal 2012. Duke Nukem Forever is planned to launch in mid-June. Nicktoons MLB is expected to be released this summer.

NBA 2K12 and The Darkness II are expected to release in our fiscal third quarter. Major League Baseball 2K12 is planned to launch in the fiscal fourth quarter. In addition, included in our guidance are XCOM and some other unannounced titles planned for release throughout the year. We'll have more to say about them in the coming months. While it's still very early to discuss fiscal 2013, we have a very strong pipeline of titles in development, and we currently expect to achieve substantial earnings growth, including non-GAAP earnings per share in excess of $2. In summary, we are very pleased with the performance we delivered in fiscal year 2011, creatively, operationally, and financially. Given our industry-leading creative talent, clear strategy for growth, and strong financial foundation, we are well positioned for continued profitability and success in fiscal year 2012 and substantial growth over the long term.

Now I'll turn the call back to Strauss.

Speaker 1

Thanks, Karl and Lainie. 2011 was a fantastic year for Take-Two, and we emerged stronger than it has been at any other point in our company's history. This was made possible through the hard work and dedication of all of our employees around the world. I'd like to thank all our colleagues for their efforts in making Take-Two what it is today and providing the foundation for what it can be tomorrow. We'll now take your questions, operator.

Speaker 5

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. If you'd like to ask your question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in 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 headset before pressing the star key. Our first question comes from the line of Justin Post from Merrill Lynch. Please proceed with your question.

Speaker 2

Great. Two things. First, maybe since it's already launched, if you could give us an update on how L.A. Noire is doing in the channel and what you're seeing there. Strauss, you know we've known you to be pretty conservative over the last year. To give 2013 at $2 is a little different. What makes you confident in that number? Are most of the titles that year going to be front-end loaded, or is there a potential slippage in 2013? Thanks.

Speaker 1

Thanks, Justin. You know we're thrilled with the launch of L.A. Noire. It's such a terrific game. The critical response has been wonderful. Metacritic ratings are high, and consumer acceptance has been great here and actually around the world. The initial ship is promising. We don't give out those numbers yet. Real pleased. The early feedback from the channel is also exceedingly strong. No complaints. As we said today, the timing, it's a little early. We try to be folks who shy away from rosy projections, and we'd rather announce things after they happen. This looks like it's off to a very good start. To your question about 2013, I think the reason we felt comfortable is, look, the company's changed significantly in the last couple of years, and execution's gotten a lot stronger. The pipeline is indeed strong, and we feel it's more and more predictable.

We did want to make the point, and I think I alluded to it in our last call, that we've just enjoyed a very profitable year, and we're looking forward to two more years of profitability. While there's certainly volatility one can expect against the results of any entertainment company, it's nice to have that outlook, and we thought we should share it. We feel good about the pipeline, and I think that takes into account the kind of slippage that one could normally expect.

Speaker 2

Great. One follow-up. The baseball contracts, does that end in fiscal 2013, or is that fiscal 2014?

Speaker 1

Yeah, we've announced that it ends in 2012.

Speaker 2

Great, thank you.

Speaker 5

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

Speaker 2

Great, guys. Maybe a quick follow-on to Justin. In terms of L.A. Noire, we've seen reports suggesting 1.6 million units in the first week, comparable with 1.9 million for Red Dead. Can you give us a sense of your strategy in terms of downloadable content? Do you look for certain gates to hit, and then you say, OK, let's continue developing iteration three and four of downloadable content? Maybe a quick follow-up on any impacts to the business from the PlayStation Network outage. Thanks.

Speaker 1

Yeah. You know, again, we certainly don't want to be subject to comping all of our new releases of new franchises against the extraordinary success of Red Dead Redemption, and every title stands alone. That said, we have every reason to believe that L.A. Noire is another strong franchise for this company, and no matter how you slice it, it's a very successful release. To be able to say that again, it's extraordinary. If it needs to be said, this management team is just immensely grateful to Rockstar Games for delivering another superb title and to 2K for all of the franchises they've been delivering of late. One can never take that for granted. The hit ratio of this group is nothing short of extraordinary. In terms of downloadable content, we haven't announced anything yet. We'll leave that to Rockstar Games to announce.

Suffice it to say that we do see this as a powerful new franchise for our company. As far as the PSN outage, no, they were back up and running before we launched L.A. Noire, and we didn't see that. I mean, obviously, never a good thing, but we didn't see it had any negative influence on us.

Speaker 5

OK. Thanks, guys. Our next question comes from the line of Arvin Bhatia from Stern Aggie & Leach. Please proceed with your question.

Speaker 2

Thank you, guys. Congratulations on a good quarter and the launch of L.A. Noire. A couple of questions. First, Duke Nukem, and given its history and the revival, et cetera, can you give us a broad sense of the economics in that title versus a typical AAA title where break-even levels might be X? Where do you think Duke Nukem, how we should think about break-even levels there so that we could form some expectations on upside, et cetera? The second question is on your basketball title. I'm not sure if I missed it, but did you address the potential lockout and how that's factored into your numbers this year?

Speaker 1

Lainie, you'll answer your question about Duke Nukem Forever and profitability.

Speaker 0

Arvin, that's Duke Nukem Forever. The economics of that title are in line with the average of our publishing titles. It does have a significant marketing budget behind it and also caps off. Obviously, I would say it's in the medium range, but it certainly has been in development for a long period of time. It falls right in line with the rest of our titles.

Speaker 1

Yeah, on the possibility of a basketball lockout, we haven't included any potential effects in our guidance. I think it's fair to say that a lockout wouldn't be a good thing, but it's hard to know what'll happen.

Speaker 2

Great. Thank you.

Speaker 5

Our next question comes from the line of Michael Hickey from JNCO Partners. Please proceed with your questions.

Speaker 2

Hey, guys. Congratulations on your fiscal year and congratulations to the Rockstar team for another phenomenal release. In regards to L.A. Noire, Strauss, I was hoping you can talk about maybe the relationship of Rockstar working with Team Bondi and how you view that, and maybe if in the future they may continue to work with external developers where Rockstar can own the IPs that they can leverage the talent. I have a follow-up.

Speaker 1

You can get your phone if you want while I answer it. I think the relationship with Team Bondi obviously worked out phenomenally well. The team in Australia did an incredible job. I visited the studio a year and a half ago, and the map they built of Los Angeles, for example, was nothing short of extraordinary. Obviously, the motion capture technology we've talked about a lot, and that's allowed Team Bondi and Rockstar Games to deliver this extraordinary experience. I think the results speak for themselves. We had a combination of working with a very strong external studio and the oversight, management, and creative engagement of the team at Rockstar Games, and the results speak for themselves. It wouldn't be something I'd want to talk about in terms of a future desire to work with external developers.

I suspect that the Rockstar Games team would take that on a case-by-case basis.

Speaker 2

OK. In regards to BioShock Infinite, I really enjoyed reading the previews on that game, and certainly when the initial trailer came out, it was really exciting. A lot's changed since BioShock. The original came out in 2007, and it's nice to have Ken re-engaged in the franchise. I was just curious if you could share with us your thoughts of the health of the franchise after BioShock 2, maybe how you see this market opportunity versus how you saw BioShock. I remember BioShock came out. It felt kind of niche-y and a little bit too scary maybe for mainstream, and I think it proved otherwise. I think you kind of implied this, but I'm assuming you said calendar year 2012. I'm assuming that it's not in your guidance for fiscal 2012. If you could just clarify that, that'd be great.

Speaker 3

Hey, Mike. It's Karl. In terms of Bioshock, I mean, obviously, we're thrilled with the franchise overall. When you're selling over 8 million units in a franchise, it's a fantastic thing for both the original Bioshock and Bioshock 2 as well. It is fantastic having Ken re-engaged. Honestly, the press and all of the demos and the things that you've seen in the past speak for itself. I think that our view on the franchise at this point is that we're in incredibly terrific shape, and Ken is obviously doing something very different with the franchise than has been done before, and that's a good thing. It's a highly, highly creative endeavor, and we're thrilled to be in business with Ken and having him at the helm again at Bioshock. We're very, very optimistic about the health of the franchise and think we're in great shape there.

In terms of fiscal 2012, it's not in the numbers.

Speaker 2

OK, thanks, guys.

Speaker 5

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

Speaker 2

Yes. Good evening. Thanks for taking my call. Two questions, if I might. First, given that if you look across the current game cycle, you perhaps have had one or now two of the only new, wholly new franchises launched in the cycle that's been commercially successful outside of what Nintendo has done with casual games, with Bioshock and maybe now with L.A. Noire. Does that make you more ambitious or perhaps give you more confidence in launching other new franchises? A lot of what's coming out right now is sort of the relaunching of franchises that were out before, things like Duke Nukem. Of course, I assume we're going to see another GTA at some point. What's your thought about new franchise investment? My second question, a little more minutiae, just to give us some sense of the composition of the digital revenues between DLC and mobile and online.

Thanks.

Speaker 1

Yeah. Look, part of our stated strategy has been to launch new IPs regularly. The companies have a track record dating back for some time, I think to 2007 now, successfully launching at least one new IP a year. We tend to own that intellectual property and benefit from it over a long period of time. I think the strategy is well stated to be both. First of all, the goal is to be the most creative company in the business and to delight audiences with our entertainment properties. We can do that with our existing franchises, and we hope to. We always need to keep our business fresh, and that means launching new franchises. You're right that launching an untested, unheard-of IP is a different challenge than a sequel.

At the core, it still comes down to the same thing: having the best creative teams in the business and encouraging them to pursue what they're passionate about, and then standing behind that and investing behind that, and doing so in a rational way, and we hope a highly efficient way. Then marketing and distributing worldwide with the financial resources we're fortunate to possess and with whatever creative abilities we have, all the way from the top to the most far-flung areas of our organization. I am pleased that I think we're doing that job as well as anyone in the business. We don't take anything for granted. We're grateful every day for the creative work of our label that allows us to be in a position to take credit for these results in a call like this. This is a strategy. The answer to your question is both.

Lainie, you can give a little more color on digital.

Speaker 0

Sure. Dan, our digital sales are currently comprised of our content that we deliver to the console devices by Xbox Live and PlayStation Network, including our add-on digital content, our episodes, our virtual goods. It also includes our content that we sell through the online digital retail stores, such as Steam, Direct Drive, including all our full PC titles and add-on digital content for those as well. Content sold to mobile platforms, so the PSP, the iPod, the iPod Touch, iPad, either directly via the Wi-Fi or through compatible services or stores, is also included.

Speaker 2

Maybe you could give us an idea of what that mix was, what % fell into which bucket?

Speaker 0

We don't have a breakdown of that. Overall, our digital sales for the year was $102 million, which is about 9% of our net revenue.

Speaker 2

Got it. Thanks to the seller.

Speaker 5

Our next question comes from the line of Oltul Baga from ThinkEquity. Please proceed with your question.

Speaker 2

Hey, guys. Thank you for taking my call. Can you talk a little bit about your partnership in Asia, specifically Tencent? This NBA Online has been in making for some time. Can you give us some update? When do you expect NBA Online launch, and is this something that you're assuming in the model in the guidance that you talk about?

Speaker 3

Absolutely. It's Karl. We're actually thrilled with all of our partnerships in Asia. As I said before, we've now announced three between Tencent, Nexon, and XL. We don't have any information to share at this point in terms of development progress and when we plan to release or go to beta on these titles. All the titles are in development, and things are going very, very well. We're thrilled with our partnerships and how things are going. In terms of are these numbers, are we expecting these Asian partnerships to show revenue in 2012? They're not in the numbers currently at this point.

Speaker 2

Gotcha. Just to follow up, digital, you mentioned it was $102 million. Can you give us some sense? Where do you expect digital to be next year and two years from now?

Speaker 3

Thank you.

Speaker 0

We have not given a forecast specifically for our digital revenue for 2012. However, over the long term, we expect it to increase as a % of overall revenue. In the shorter term, it varies based on our release schedule and the success of our title. Last year, we had very strong digital revenue due to the success of our add-on digital content for Red Dead Redemption and also strong offerings for Borderlands and Grand Theft Auto. We also benefited from the release of Sid Meier’s Civilization V, which is a PC title, which had a significant amount of full-game downloads. We will keep an eye on it. We continue to look to grow it going forward.

Speaker 2

Thank you.

Speaker 5

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

Speaker 2

Yes, thanks for taking my question. Two quick things. First of all, on the digital side, maybe you can just sort of quantify how many more digital SKUs or how much more content you'll have in fiscal 2012 versus what you put out in fiscal 2011. Just a quick clarification on your guidance. NBA is included in your current guidance.

Speaker 1

Yeah. We don't really have any more detail to offer on digital right now because that's yet to be announced elements of our release schedule. On the NBA, yes, it's in our guidance. However, whatever effects of the lockout are not, because we don't know what those would be, we can't really quantify them.

Speaker 2

Thank you.

Speaker 5

Our next question comes from the line of Edward Williams from BMO Capital Markets. Please proceed with your question.

Speaker 2

Good afternoon. Just a couple of other quick questions to follow up a little bit on digital. Can you talk a little bit about what the growth rate was like for things like the Steam and Direct Drive in terms of what sort of traction you're seeing there relative to packaged goods sales, corresponding packaged goods sales against those platforms? Also, Karl, if you can talk a little bit about the Asian online arrangements that you have set up. Could we see some of what working with Tencent and Nexon, some of that product make its way into the Western markets, or do you have quite a system of that product when it comes out on an MMO style or online transaction style to come into the Western markets? Lainie, lastly, can you talk about the value of the NOLs at this point?

Speaker 1

You know what? In terms of your first question, we don't have a point of view on Steam versus on the market point of view. We're really proud of how we're doing in our digitally delivered offerings, and it's an important part of our strategy as it is a part of our competitor's strategy. The goal is to make our products available to consumers where they want them, when they want them, on the device that they want them, and in the business model that they want them. Our goal is to use our content, as Karl mentioned, to develop AAA experiences for all viable platforms, whether they're ephemeral or physical. It's a detail to us over time. We're committed to the console market. It's still 90% of our business. We're obviously really proud of our abilities to distribute physically, and we have growing representation in the digital market.

In my opinion, this is less about strategy and more about execution. You need to be in digital distribution. It's not especially complicated. Our partners are making it easy, and everyone's doing it. We're doing it as well. In terms of your question about Asia, Karl, take that.

Speaker 3

Hey, Ed. In terms of the agreements we have, in terms of the initiatives we have with our online initiatives with our partners in Asia, look, I mean, at this point in time, our projects are contemplating releases in Asia. That being said, of course, we've contemplated other markets in the world, but we don't have anything specific to announce at this point.

Speaker 1

There's no question there's plenty of opportunity. The reason we started in Asia is these are robust markets where lots of products do well as massive multiplayer products. For example, in Japan, the massively multiplayer business is a very significant business, bigger than packaged goods. We think it's a smart way to enter the market. It's too early to say exactly what the opportunities are, but you can be certain that our eyes are open to them.

Speaker 0

In terms of the NOLs, at the end of the year, our estimated U.S. NOL was approximately $310 million, and our estimated foreign NOL was approximately $75 million.

Speaker 3

OK, thank you very much.

Speaker 5

Our next question comes from the line of Doug Creutz from Cowen and Company. Please proceed with your question.

Speaker 2

Thanks. I wonder if you could just talk about Max Payne 3 and Agent. You didn't mention them on the call, but you have mentioned them in the past. Maybe confirm whether they're still in development. More generally, if you could talk about what you think the capacity is for Rockstar Games as a whole. I know there's several in terms of how many titles they can be working on in parallel with each other and still maintain the high quality that we've seen in the past. Thanks.

Speaker 1

Thanks, Doug. Yeah, Max Payne and Agent are still in development. In terms of Rockstar's bandwidth, we've seen of late what they're able to do, which is now two years in a row to develop new intellectual property into really meaningful franchises. That's industry leading, and it's not that it comes easily for us, but we are able to achieve it, and we're really proud of it. I'm confident that we have the bandwidth to achieve any of our goals and initiatives, and they remain to put out a limited number of the highest quality titles in the interactive entertainment business.

Speaker 2

All right, thank you.

Speaker 5

As a reminder, ladies and gentlemen, it is star one to ask a question. Our next question is coming from Justin Post from Merrill Lynch. Please proceed with your question. Justin, your line is live.

Speaker 2

Sorry about that. I wanted to ask a question about the Rockstar Games contract and the new management contract. I think in the release, it said the terms of the Rockstar Games contract aren't that different. Could you talk about signing that contract, whether there really are any material changes, maybe how long it will last for? On the management contract with Zelnick, has that changed materially? If you can comment on that at all. Thanks.

Speaker 1

Yeah. We actually said in our release that the economic terms of the Rockstar extension are substantially the same as the prior deal. We've been in business with Sam, Dan, and Les for a better part of 10 years. They're part of our DNA here. I hope that we're part of theirs, and we're thrilled to be in business with them. We're not going to be talking about our creative team's employment contracts anymore going forward. We think that our relationships with creative talent are actually a significant competitive advantage, and it doesn't behoove us to discuss them publicly. On the other hand, the management contract is fully disclosed. It's in our 8K, and you can read it in all its detail if you like.

Speaker 3

Great. Thank you. Congratulations on getting that re-signed.

Speaker 5

There are no further questions in the queue. I'd like to hand the call back over to management for closing comments.

Speaker 1

Thank you so much for joining us. Obviously, we're both thrilled and very grateful for last year's results. As always, we have an ambitious set of goals in front of us. We're thrilled to have kicked off the year with L.A. Noire. We're incredibly excited about Duke Nukem Forever and the rest of our upcoming releases. This is a world where the only thing that limits us is our ability to execute. The opportunities are there in front of us. Thank you so much for joining us.

Speaker 5

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