Take-Two F3Q09 (Qtr End 7/31/09) Earnings Call Transcript

| About: Take-Two Interactive (TTWO)

Take-Two Interactive Software, Inc. (NASDAQ:TTWO)

F3Q09 Earnings Call

September 1, 2009 4:30 pm ET


Cindy Buckwalter - Executive Vice President

Strauss Zelnick - Chairman of the Board

Benjamin Feder - Chief Executive Officer, Director

Lainie Goldstein - Chief Financial Officer


Heath Terry - FBR Capital Markets

Daniel Ernst - Hudson Square Research

Mike Hickey - Janco Partners

Edward Williams - BMO Capital Markets

Arvind Bhatia - Sterne Agee & Leach

Benjamin Schachter - Broadpoint


Greetings, ladies and gentlemen and welcome to the Take-Two Interactive Software Q3 2009 results. (Operator Instructions) It is now my pleasure to introduce your host, Ms. Cindy Buckwalter, Executive Vice President for Take-Two Interactive. Thank you, Ms. Buckwalter. You may begin.

Cindy Buckwalter

Thank you. Welcome and thank you all for joining us for our third quarter conference call. Today’s call will be led by Strauss Zelnick, Chairman of Take-Two; Ben Feder, our CEO; and Lainie Goldstein, our CFO. Our team will be available to answer your questions during the Q&A session following our prepared remarks.

Before we begin, I would first like to quickly 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 our 10-K for the fiscal year ended October 31, 2008, and our 10-Q for the second quarter ended April 30, 2009. These documents may be obtained from our website at www.taketwogames.com.

Now I will turn the call over to Strauss.

Strauss Zelnick

Thanks, Cindy and good afternoon, everyone. Today we’ll review our financial results for the third quarter and discuss our operating highlights, our upcoming product lineup, and our outlook for the balance of the fiscal year.

Take-Two's third quarter results were in line with the guidance that we provided in July. Our top line results were slightly better than our guidance due to higher-than-expected revenue from catalog titles.

Recent reports have confirmed that the U.S. retail environment for interactive entertainment has not significantly changed since our last call. We are continuing to see weak consumer spending, slow adoption of hardware, and caution on the part of retailers with respect to both their initial orders of new releases and inventory management.

Internationally we are seeing similar trends throughout Europe and Asia. Now on a positive note, France and Germany have each reported modest economic growth and they have announced that they are officially out of the recession. European hardware sales have held up reasonably well on the PS3 and Xbox 360 and we have seen a broadening of market demographics through further hardware adoption of the Wii and DS.

In the past month we have experienced increased sales of our catalog titles in France and Germany, which we think bodes well for upcoming triple A releases. Our industry success is driven by hit titles and we believe that several key products from our company and our peers will play an important role in driving the business this holiday season.

In Asia, western titles are gaining share across the region as high quality entertainment products and strong production values are becoming increasingly important to these consumers. China and Korea continue to enjoy exponential year-over-year growth in the online interactive entertainment category and analysts have predicted that the market could exceed $5 billion by 2012. We hope to benefit from the growth of this market through our partnership with Ten Cent to bring NBA 2K online to Asia.

While the overall software market in Japan has declined year over year, there’s been growth in the Xbox 360 and Nintendo DS. We’ve seen our presence expand significantly in the region, driven by our proven brands and strong catalog, including titles such as Grand Theft Auto 4 and Midnight Club Los Angeles. There are many opportunities for Take-Two to capitalize further in this market, including investing in online products and leveraging the strength of our proven intellectual property.

All that said, clearly this has been and continues to be a challenging year for our industry and for our company. We believe that a prudent outlook is appropriate and we are maintaining our guidance for the fiscal year.

Looking forward, we are very excited about our terrific holiday lineup. The holidays historically have been the strongest sales period for our industry and we think that interactive entertainment will continue to be an important category this year. We also believe the retailers and consumers will concentrate on triple A and value-oriented titles, the two key areas of our portfolio and strategy. We are pleased that both Sony and Microsoft have reduced the price of their systems and we hope that will serve as a catalyst for the continued growth of our industry and also help to expand the audience for our titles.

We are confident in our long-term outlook. We have an exceptional pipeline of titles for 2010. We have a strong balance sheet and remain focused on the efficiency of our business and we are both proud and pleased to work with many of the most talented people in our business.

Now I will turn the call over to Ben.

Benjamin Feder

Thanks, Strauss. Today we reported net revenue for the third quarter was $139 million, a non-GAAP net loss was $50 million, or $0.66 per share This compared to revenue for the 2008 third quarter of $434 million, and non-GAAP net income of $71.5 million, or $0.93 per share. It’s important to note that these results for our third quarter of 2008 reflected significant revenue from Grand Theft Auto 4, which launched at the end of our second quarter last year.

Third quarter sales this year were led by the big two, Grand Theft Auto 4 and Major League Baseball 2K9. Our catalog was once again a strong contributor to our quarterly performance, about 70% of our publishing revenue, and continues to provide predictability and visibility to our business. We ended the third quarter with $175 million in cash.

I would like to recap some of our business highlights for the quarter. We enhanced our balance sheet by completing a $138 million offering of convertible notes. This additional capital will allow us to react quickly to take advantage of opportunities that we may see in the marketplace for studio or IP acquisitions, strategic investments, and other initiatives to grow our business and create shareholder value.

Underscoring our commitment to increasing our presence in Asia, 2K Sports expanded on its successful relationship with the NBA by securing a multi-year license to develop an online basketball simulation game in China, Taiwan, South Korea, and Southeast Asia. 2K Sports in partnering with Ten Cent Holdings Limited, one of China’s largest online videogame operators, to co-develop the online version of our top selling and top rated NBA 2K franchise, and distribute it in China and other key markets.

While we are only in the initial phase of this initiative, we are excited to be partnering with both the NBA and Ten Cent to extend the reach of our cornerstone sports brand.

2K Games released our first offering for the iPhone with Sid Meier’s Civilization Revolution. The game launched on August 10th and quickly became a number one selling game on Apple’s app store. It has since remained among the top 25 selling titles across all applications in most territories. We are very pleased with its initial performance which illustrates the power of our internally owned intellectual property to drive sales on any platform.

Internally owned IP provides us with the added benefit of creating new content at low incremental costs. We look forward to selectively bringing more of our established franchises, as well as new brands, to the Apple platforms, including the fall releases of Grand Theft Auto: Chinatown Wars and Rockstar Games and Timbaland Present [Beat-a-Rater].

We exhibited at Games Con in Germany, which was hailed as the largest videogame trade event in the world with a quarter of a million attendees. We are very proud that Mafia 2 won for best PC game of the show and its developer, 2K Check, also won for best developer. We had thousands of consumers at our booth and received positive feedback from the European media and retailers for our titles, particularly Grand Theft Auto Episodes from Liberty City and Borderlands and [Beat-a-Rater], as well as Bioshock 2, Mafia 2, and Red Dead Redemption.

2K Sports launched the sequel to its popular Major League Baseball arcade franchise, The Bigs 2. 2K Games and Bethesda Softworks partnered to launch a value rich bundle of Bioshock and The Elder Scrolls 4: Oblivion for the Xbox 360 and PC.

Turning to our operations, we recently completed our initiative to outsource entirely our inventory fulfillment services. We now have an agreement with [Cineram] International to handle fulfillment for all of our Canadian business. We expect this initiative to enhance the flexibility and efficiency of our business and offer a high level of service to our customers.

As announced today, we have reached an agreement within principle to settle a previously disclosed consolidated securities class action. The litigation, which dates back to 2006, is related to allegations of the reported hot copy content and historical stock options granting practices. We are pleased to have reached this settlement and put this historical matter behind us.

Moving on to our holiday lineup, we are highly focused on delivering a diverse portfolio, led by two new titles from Rockstar Games, Grand Theft Auto universe. On October 29th, Rockstar Games will launched Grand Theft Auto Episodes from Liberty City, featuring two standalone games on Xbox 360 for $39.99. We think this title is perfectly timed and priced for the holiday season and will be a must-have item for both retail and consumers.

Grand Theft Auto Episodes from Liberty City will include The Ballad of Gay Tony and the Lost and Damned, two unique gaming experiences with the trademark characters and action that can only be found in the world of Grand Theft Auto.

We will also simultaneously release The Ballad of Gay Tony on Xbox Live as a downloadable episode. The Ballad of Gay Tony concludes a story arc that began in Grand Theft Auto IV with the combination of exciting new game play content and new characters. The first trailer launched today and will be supported by a comprehensive marketing campaign that will continue through the launch, positioning Episodes from Liberty City as the brand new Grand Theft Auto experience for this holiday.

Rockstar will also release Grand Theft Auto: Chinatown Wars for the PSP, PlayStation network, iPhone, and iPod Touch. We are proud to introduce this highly rated handheld game on the PSP, a platform on which millions of fans have enjoyed GTA games. The title is planned for release within the October launch window of the PSP Go and we expect to leverage the PR and industry buzz around the hardware introduction.

Award-winning studio Rockstar Leads has expanded and enhanced its critically acclaimed titles to make it the fastest, most explosive portable Grand Theft Auto experience to date. Editions for the PSP iteration of Grand Theft Auto: Chinatown Wars include more visual effects for the wider high definition screen, including more particle effects, dynamic lighting and shadowing, and higher resolution textures, a brand new character with a unique story thread, a variety of non-story missions, including rampages, and six new in-game radio stations featuring over 100 minutes of new music.

Grand Theft Auto: Chinatown Wars is the ultimate distillation of the best experiences and features of a Grand Theft Auto title all rolled into Sony’s powerful portable platform.

2K Games will release Borderlands on October 20th in the U.S. and October 23rd internationally. This title has generated significant pre-launch excitement for both its unique art style and combination of first person and role-playing action. Developed by the talented team at Gear Box, Borderlands is poised to introduce a new game genre to our industry, the role playing shooter, or RPS. Several industry analysts and top gaming press have already picked Borderlands to be the sleeper hit of this holiday season.

Later this month, Rockstar will launch Rockstar Games and Timbaland present Beat-a-Rater for PSP and PlayStation Network. The title will also be available for the iPhone and iPod Touch later this fall.

Building on the demand from consumers for personal music games but with a clear focus on genuine music creation, Beat-a-Rater will feature thousands of loops and sounds created by both Timbaland and Rockstar Games. The title is being developed by Rockstar Leeds, the studio behind Grand Theft Auto: Chinatown Wars, Grand Theft Auto Liberty City, and Grand Theft Auto Vice City Stories. Beat-a-Rater will put the power to make professional level music at your fingertips in a format that is portable, accessible, and fun, allowing anyone to create great sounding music.

2K Sports will release NBA 2K10, marking the 10th anniversary of our number one rated and number one selling basketball franchise. We are excited about this year’s game, which allows the critical -- follows the critical and commercial success of NBA 2K9 that has sold over 2 million units worldwide. Leading up to the launch of NBA 2K10, 2K Sports is offering NBA 2K10 Draft Combine, a downloadable experience for X-Box Live and PlayStation Network that allows gamers to create their own custom player, improve their skills through training and drills, and later import this player into NBA 2K10. We think this is an innovative way to use downloadable content to provide a deeper gaming experience leading up to and throughout the launch of the game.

2K Sports will also release NHL 2K10, the latest installment of our hockey franchise. This year’s game will feature new online options and presentations, co-op game play, blog integration on 2Ksports.com, and a create-a-team mode. The Wii version of the game is already garnering strong reviews, scoring 8 out of 10 from Nintendo Power, and for the first time ever, NHL 2K10 will support online play on the Wii as well as take advantage of Wii motion plus and Wii Speak support.

Later this fall, 2K Play will introduce Ringling Brothers and Barnum & Bailey Circus, and a new slate of Nickelodeon titles, based on [Nee Hao Kilon], Backyardigans, and Dora the Explorer.

Looking ahead to next year, we have a strong lineup that includes sequels to some of our most successful franchises, including Bioshock 2, Mafia 2, Max Payne 3, and Red Dead Redemption. We are continuing to evaluate the optimal release window for these titles and still plan to release all four titles in the first half of calendar 2010. At this point, we don’t expect any of these titles to launch within our first fiscal quarter ending January 31, 2010.

We also have other new titles planned for the remainder of 2010 that will be announced in the coming months. This Thursday night, a new exclusive trailer for Bioshock 2 will be appearing on Game Trailers TV with Jeff Keeley on Spike TV that will feature never-before-seen footage of the game’s multi-player action. We think it looks fantastic and will offer a taste of what gamers can look forward to in the next year.

I want to emphasize that Take-Two remains very well-positioned with a strong balance sheet and one of the best portfolios of triple A intellectual property in our industry. Our goals remain the same -- to explore and capitalize on new growth opportunities, continue to diversify our product portfolio, improve our efficiency and consistency in meeting release dates, and set new benchmarks for innovation and creativity.

I would like now to turn the call over to Lainie.

Lainie Goldstein

Thanks, Ben and good afternoon, everyone. Today I will review our third quarter results and then discuss our outlook for the balance of the year.

Net revenue was $138.6 million in the third quarter compared with $433.8 million a year ago. Last year’s Q2 results included significant sales of Grand Theft Auto 4, which launched at the end of Q2 of last year.

Non-GAAP net loss was $50.4 million, or $0.66 per share, compared to a non-GAAP net loss of $71.5 million or $0.93 per share last year. Our press release provides a complete reconciliation of our non-GAAP to GAAP numbers.

As expected, we had a relatively light new release schedule in Q3. The quarter’s revenue drivers were catalog titles from Grand Theft Auto 4. Other top titles included the Bigs 2 and Major League Baseball 2K9.

Our GAAP results for the third quarter were a net loss of approximately $55 million or $0.72 per share, compared with net income of $52 million or $0.67 per share in the third quarter of 2008.

Our GAAP results this year included $4.6 million in stock-based compensation expense and approximately $400,000 of professional fees and expenses related to unusual legal matters.

In looking at our consolidated results, our non-GAAP gross margin for the quarter was 17.5% compared to 41% in Q2 of last year, when Grand Theft Auto 4 represented a significant percentage of our revenue.

Our gross margin this quarter was also affected by the following factors: distribution represented a higher percentage of our net revenue than in Q3 of last year, 31% compared to only 12% last year. Sports represented a much higher percentage of our publishing revenue than last year.

We realized accelerated amortization expense related to our Major League Baseball license based on our lower-than-expected sales of MLB titles for this year. We also realized lower average pricing for several of our titles, as well as a significant percentage of revenue from catalog sales.

Excluding our sports and distribution businesses, our split between North America and international revenue was about 50-50.

Non-GAAP operating expenses in the third quarter were approximately $59 million, down significantly from the prior year third quarter and also from Q2 of this year. Sales and marketing expenses accounted for the largest increase of over $17 million, compared to Q3 last year, primarily due to the launch of Grand Theft Auto 4, which had a significant marketing budget.

G&A decreased by $7 million from Q3 2008, driven by lower consulting and professional fees, reduced performance based compensation expense, and our cost-cutting initiatives. A portion of the decrease was also related to foreign exchange effects.

R&D decreased by about $2 million, primarily due to higher capitalization rates, foreign exchange effects also had a positive impact.

Depreciation and amortization decreased by $1.7 million from Q3 2008 due to last year’s sale of certain assets in connection with outsourcing our U.S. distribution services.

Moving on to our balance sheet, at the end of Q3 we had $175 million in cash. Our accounts receivable reserve was about $44 million at the end of the quarter, or approximately 39% of gross receivables, about the same as the third quarter last year.

Inventory at the end of the quarter was approximately $64 million, down significantly from year-end due to seasonality.

Software development costs and licenses have increased in line with the significant development efforts around our triple A holiday and fiscal 2010 releases. We currently have 37 titles in various stages of development.

Now for our outlook, which is provided on a non-GAAP basis. We are updating our fiscal 2009 guidance slightly based on our Q3 actual results and our Q4 forecasts. For the full year, we expect non-GAAP net loss per share in the range of $0.81 to $0.87 on $975 million to $1 billion in revenue. This excludes stock-based compensation expense of $0.30 per share and expenses related to unusual legal matters of $0.10 per share.

As we said previously, maintaining our release schedule is critical to achieving our fiscal year numbers. Our results might also be affected by variability in foreign exchange rates, which are difficult to forecast.

Moving on to Q4, we expect non-GAAP net income in the range of $0.30 to $0.35 per diluted share on $350 million to $375 million in revenue. This excludes stock-based compensation of $0.08 per share, and expenses related to unusual legal matters of $0.01 per share.

We tightened our Q4 guidance range as we’ve obtained more visibility into Q4.

Since Q4 is forecast to be profitable, diluted EPS will reflect the impact of our stock compensation plans on the convertible offering for the first time since the converts issuance. Based on our current forecast in calculating diluted EPS, U.S. GAAP requires us to assume our notes were converted at the beginning of the quarter, which means $13 million more shares outstanding during the quarter. The calculation will also exclude after-tax interest expense on the convert. This brings our weighted average diluted shares outstanding to approximately $92 million in Q4 for an accounting dilution impact from the convert of approximately $0.03.

As the full fiscal year 2009 guidance is expected to be a loss, the shares underlying the convert are anti-dilutive, so diluted EPS will equal basic for the full year.

Our key releases in Q4 are Rockstar Games and Timbaland Present Beat-a-Rater, Borderlands, Grand Theft Auto Episodes from Liberty City, The Ballad of Gay Tony, Grand Theft Auto: Chinatown Wars, NBA 2K10 and NHL 2K10. Our large Q4 release schedule should result in a revenue mix of about 80% from publishing and 20% from distribution and we expect gross profit margins to increase into the low 30s in that quarter.

We expect overall operating expenses to increase in Q4 as compared to Q2 and Q3, primarily driven by significantly higher sales and marketing expenses to support the launch of our Q4 and holiday season titles.

G&A, R&D, and depreciation and amortization should remain relatively flat in Q4 as compared to Q2 and Q3.

Based on our forecast, we expect to show a few million dollars of tax expense in Q4, primarily reflecting earnings in our international territories.

I will conclude by saying that continue to remain highly focused on pursuing revenue opportunities that leverage our strong catalog of titles, as well as identifying and implementing further areas of cost savings. We are also in the midst of our 2010 budgeting process, which includes firming up our release schedule. We expect to have more to say about 2010 on our year-end call in December.

Now I will turn the call back to Strauss.

Strauss Zelnick

Thanks, Lainie, thanks, Ben and we will now take your questions. Operator.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Heath Terry with FBR Capital Markets. Please go ahead.

Heath Terry - FBR Capital Markets


Strauss Zelnick

Sorry, Heath, we didn’t actually hear that question on this end -- would you mind repeating it?

Heath Terry - FBR Capital Markets

Sure. I was just saying I was hoping you could give us an idea of what you have seen from your retail partners in recent weeks following the price cuts on hardware.

Benjamin Feder

You know, we haven’t seen -- we don’t have anything to report today on what we have seen from retail. I think our outlook hasn’t changed with respect to retail. We think they are still being kind of tentative and cautious. I think the effect of the price cut is really too early to tell and I know kind of where, you know, [wondering if we’re off cycle] in terms of our competitors but it’s really -- we don’t really have a lot of data to share in terms of what retail is seeing from the price cuts. It’s really just too early.

Heath Terry - FBR Capital Markets

Okay, thanks.


We’ll take our next question from the line of Daniel Ernst with Hudson Square Research.

Daniel Ernst - Hudson Square Research

Good afternoon. Thanks for taking the call. Two questions, if I might -- first, since earlier this year announcing that the push-out of a couple of big titles maybe gave you a little more breathing room in the development. With that time, have you done any additional restructuring within the organization to [inaudible] or do you feel like the average you get in the first year [inaudible] you know, have gotten teamwork where you want it to be in terms of scale and structure?

And then second question with the increase in games available on things like the iPhone and now PSP Go and maybe DSI Wear and of course Xbox Live, two questions on that. One is where do you think that the size of that direct to consumer digital distribution could go for you over the next one to five years? And then two, is there any comment you can give us on the margin profile of that type of game relative to the box sale? Thanks.

Benjamin Feder

With respect to the product slippage, when we initially slipped the title, we had indicated that we were taking it seriously and that something had -- you know, in our view something kind of didn’t quite work the way it was supposed to work in terms of our greenlight process and our review process, and given the technical complexities of our product development, it’s not entirely surprising but nonetheless, we took it very seriously and we continue to take it seriously.

We don’t have today kind of -- we don’t have anything to announce today in terms of how our processes will change. We are evaluating this currently. We have looked for outside help in terms of ways to improve our performance and improve our process and we think we are making some progress but this is still a work in progress and we are still trying to -- we are fixing our processes to the extent that they were broken in the first place but somewhere between process and the complexity of our games, some of these delays are expected and some of them should not be expected and we are trying to -- we are still in the process of figuring out what’s what, what’s where.

In terms of the iPhone, Strauss, do you want to handle that?

Strauss Zelnick

Yeah, I think Dan, you asked about the iPhone specifically in digital opportunities more generally speaking and as you know, a bit part of our strategy, a third of our strategy is the notion of innovation and we have outlined -- we outlined it two years ago and we continue to hammer home the notion that ongoing innovation is a big part of what we want to do around here. Mobile platforms in general, the iPhone and iTouch more specifically, are a key part of that. You know, six out of 10 human beings on the earth have mobile devices and they do use them to play interactive entertainment and to enjoy it. It’s been somewhat hard to find -- for the industry, not for us -- to find the right business model to approach that. We are really proud of our intellectual property and I guess 16 franchises that have sold more than a million units, all of which are owned by our company. You know, we think we have the best collection of owned intellectual property in the industry. So bringing that to the consumers who don’t have consoles and maybe don’t even have PCs but do have mobile devices is pretty important. Just yesterday we made an announcement about Chinatown Wars being available on the iPhone and iTouch. Beat-a-Rater obviously will be available on Apple platforms and we are going to continue to look to that as an opportunity. It is early days and the price points vary from consoles and handheld dedicated devices and it isn’t clear what the consumer up-tick will be but I think all of us are proud and excited by first of all, we think the quality is just phenomenal -- obviously we think that but that is our strategy, right? Whatever platform we are producing for, the quality should be A-plus and the titles just are phenomenal. We’re really proud of that and we think consumers will see it the same way.

In terms of its economic impact, it’s too early to say.

More broadly on digital, you know, we are a pioneer in downloadable content with the two episodes for Grand Theft Auto 4. At the same time, retail remains our primary channel and so we are making those episodes available without having to buy the original title on a disc this fall for consumers and we are really excited about that. We think it’s a terrific opportunity for consumers.

So it was sort of the best of both worlds -- we were able to lead the way from an innovation point of view by seeing how downloadable content would do. They were critically highly acclaimed, creatively highly acclaimed. I will tell you that the team at Rockstar was utterly engaged creatively with their creation and that’s a big part of what we do around here, is to make sure that our talented people here are working on what they are passionate about, not to the detriment of our economics, in concert with our economics but obviously it’s a win-win if we can work on things that people are passionate about and also create an opportunity for economics for the company and the shareholders and at the same time, pursue our strategy of innovation.

So I think that is a perfect example of trying something digitally, making it available in our biggest channel, which is retail, in a way that benefits everyone and primarily benefits consumers. There are also a lot of other digital opportunities on the horizon, including the on-live system and other competitive systems. Too early to say how they will develop but obviously anything like that is a good thing for us.

Finally, your question on margin for digital, the business will be different. It doesn’t encompass hard goods and it is by definition most likely a more open system than the traditional console business and there is an opportunity for us to drive a higher margin from doing that.

But now we are speculating about what will succeed, what content will work, which systems will work, and what the economic model will be, so I think I will leave it at that.

Daniel Ernst - Hudson Square Research

Excellent. Thanks for the color.


We’ll take our next question from the line of Mike Hickey with Janco Partners.

Mike Hickey - Janco Partners

Thanks for taking my questions. Lainie, I think you said you are working through your fiscal 10 budget process now, but some of the key drivers for your fiscal 10 were supposed to come out in fiscal 09, that being Bioshock 2, Max Payne and Red Dead, or Mafia, I guess, not Max Payne. I think that was a fiscal 10 event but do you expect any adjustment to your original sales assumptions from those games now coming out in fiscal ’10 than what you had in fiscal ’09?

Lainie Goldstein

Well, as we are building our fiscal 2010 budget, we are looking at it in a fresh way in terms of what is going on in the market right now, what the competitive landscape looks like, and the timing in which these games are going to be released.

Mike Hickey - Janco Partners

Okay, you mentioned timing -- you said post-January now for the big four. I think before you said first half of calendar year ’10 -- is that time window still consistent or is it open now?

Lainie Goldstein

That timing is consistent. We said the first half of calendar year 2010.

Mike Hickey - Janco Partners

Okay, and then finally for the games that were delayed, can you give us any sort of -- I know this may be sensitive but can you give us any sort of updates on the development of those games? Have the new milestones that have been set, have they been met? And then Strauss, you talk a lot about quality -- do you have any specific targets or ranges for quality on these sets of games?

Strauss Zelnick

Our quality standards haven’t changed. You know, we expect -- most of our games we expect to be top rated games. Some of the genres, some of the sports genres don’t have to be kind of 90s, and they are hard to get 90s in the sports genre but nonetheless, NBA for example, we expect to be extremely high rated and already is the highest rated game.

So we are not -- you know, our standards for quality haven’t changed. In terms of updates and milestones of the games that have been released, so far they are meeting their milestones. We do follow-up on the games, we are checking up on the games. They are meeting their milestones so far and we don’t expect today -- sitting here today we don’t expect any changes from our release schedule.

Mike Hickey - Janco Partners

Okay, thanks, guys.


We’ll take our next question from the line of Edward Williams with BMO Capital Markets.

Edward Williams - BMO Capital Markets

Good afternoon. A couple of questions for you -- first of call, can you just talk a little bit more about the retailer buying patterns, what you are seeing for kind of an initial order at this stage relative to a year ago and relative to earlier this year? And then as a follow-up on the iPhone, Strauss, can you comment a little bit about what you expect as far as the revenue per game is concerned and what if any cannibalization we might see on the handhelds from moving to the iPhone and the iPod Touch? And then lastly, if you can just give us whatever color you can on the FY2010 releases in terms of which games are coming in the first half of the year or what you have at this point that we can kind of look at and focus on for that time period.

Strauss Zelnick

In terms of your first question, retailer buying patterns, the most I can say is that they are being -- they are still being tentative and cautious. Last time we spoke, the Christmas season was probably a little more crowded, you know, Bioshock was still in there, Splinter Cell was still in there. It’s becoming a little less crowded so I think retailers are a little happier with that. At the same time, they’ve had to move some of their earnings out from this year into next year. But next year is kind of looking a little less seasonal than this year has been looking.

I will also say that retailers tend to be looking at pre-sales kind of more closely than they have in the past -- pre-orders, excuse me -- and we are seeing some of that emphasis on pre-orders but that’s really just symbolic of the caution that they are approaching the market with.

In terms of iPhone revenue per game, I think it’s really hard. We’ve launched one game on iPhone so far. It’s rare that you have both a winner and a learning experience at the same time but we have it with Civilization Evolutions. It was the number one game when we launched. On the one hand, we were very pleased with the performance. On the other hand, we are learning a lot through Civilization Revolutions in terms of price point, in terms of take-up rates and what’s driving sales. So it’s really early to tell. I mean, everybody knows the app store tends to be crowded and going more crowded, not less crowded. And we think that what drives consumers in that kind of a market is brands and franchises. Those are the guide posts that help consumers find what’s quality and what’s worth buying and that’s one of the primary reasons that Civilization Revolution did so well, apart from the quality of the game.

In terms of titles for 2010, we have nothing new to report in terms of update on timing. I think what we have said, the four major titles that we have announced so far in the first half of calendar 2010 but not before January 31, 2010.

Benjamin Feder

That narrows it down to four months. Just a couple more points on the cannibalization -- sorry, five months -- a couple of more points on the cannibalization issue. You know, we are not porting. These are standalone titles for different platforms and people use their iPhone and their iTouch in different ways than they use their PSP and their DS and people use their PC even in different ways than they use their consoles, so these are -- because we are so focused on quality here, these are not ports. These are standalone titles and they are much more like line extensions leveraging intellectual property and leveraging the franchise than they are a port.

So I think cannibalization for a company like ours with labels like ours who are focused on making sure that every release that we put out is on a standalone basis really high quality, really compelling, means that we can tailor our titles to the particular platform and that is certainly what we are trying to do on iPhone.

Could that change over time if the platforms become more similar? Sure but people have been projecting that for the PC for an awful long time and it really hasn’t happened yet, so I don’t really expect it will happen with a handheld device either. I am also pretty convinced that you use an iPhone for entertainment in a way that’s different than in the way you use a PSP or a DS in terms of how much time you devote and the engagement with the experience, the kind of engagement you actually want and I suspect the iPhone and iTouch calls for a more bite-sized experience than the PSP or the DS.

All that said, I think we’re not as worried about cannibalization and frankly even if we were, we’d rather have a larger market share for our intellectual property across all possible platforms than we would to try to parse what a consumer might possibly want in the highest value platform.

Within the very narrow rubric of doing triple A titles for our owned intellectual property, within that very narrow rubric we try to be very, very broad about what we can offer our consumers because we aim to delight them with the best products in the business.

Strauss Zelnick

Sorry, I’d add to that -- one of the things that is exciting potentially about the iPhone is the expansion of the markets. You know, Nintendo did a great job expanding the demographic of the market. The core gaming audience is still pretty much just the core gaming audience but what makes the iPhone and iPod Touch particularly exciting is their broad reach to a broad demographic, not just in the way they interact with interactive entertainment but also just their access to interactive entertainment, so the promise of a much greater audience benefits us as it does all publishers.

Edward Williams - BMO Capital Markets

Just as a quick follow-up to that, how do you see marketing to those things -- how do you see marketing to the iPhone, iPod Touch consumer and how different is that versus traditional marketing? And then secondly, how do you improve the marketing to drive the pre-orders to therefore lead to the retailers increasing the initial orders of your key titles?

Strauss Zelnick

You know, on your second question first, this is -- you know, I think it would be a mistake to think of iPod Touch and iPhone as strictly promotion for a retail sale. They can be used that way but they can also be profitable games in their own right, and so I would be careful about thinking of this as just promotion.

In terms of the marketing to iPhone and iPod Touch, I would say two things -- one is as I said, we’re still learning. We experimented, for example, with price points on iPod Touch -- we were $5, $10, $5 again and we kind of understand a little bit more about consumer behavior and what drives consumer behavior.

The other important thing to mention is that we are spending a lot of time with our marketing group making sure that we have a world class marketing group that understands consumer behavior, that can launch a new product, take the learning, learn from that, kind of propagate that throughout the company so that the next time we launch on the app store, we have better knowledge and we are better at marketing.

So I think it’s really too early to kind of call a business model for the iPod Touch and the iPhone but it’s not too early to be learning and it’s not too early to bring our brands to the market.

Edward Williams - BMO Capital Markets

Okay, great. Thank you.


We’ll take our next question from the line of Arvind Bhatia with Sterne Agee & Leach.

Arvind Bhatia - Sterne Agee & Leach

Thank you. A couple of questions -- one, you talked about Europe being relatively weak. You mentioned France and Germany, however, were doing better. I wonder if you could talk about the U.K. in particular, given they are not doing too well from your perspective. Are they down just as much as the U.S. in the recent month or so? That’s my first question, and then I have a follow-up.

Benjamin Feder

You know, the U.K., I would say maybe not -- you know, the thing about France and Germany, just showing kind of what’s known as early green chutes now. I don’t think we’ve seen that out of the U.K., per se. In terms of our own catalog and our own products, certainly for third quarter, seems to be doing okay, seems to be holding up. You know, our sales team there is kind of second to none. We are really proud of their efforts and their relationships with retail partners and so far, knock on wood, things have held up pretty nicely for us there.

Arvind Bhatia - Sterne Agee & Leach

Have you seen any piracy issues there on the DS? I know that’s not a big focus next quarter for you but have you seen any issues on DS piracy?

Benjamin Feder

Without question there are issues on DS piracy. Without going into great detail in numbers, it’s an issue.

Arvind Bhatia - Sterne Agee & Leach

Okay, and one last question -- I don’t know if you can really answer this but I just want to understand your strategy on the announcement of your next GTA franchise. Whenever that is going to be, how long prior to that do you think you will be able to communicate that? And I say that because in the past, it’s varied where you’ve announced it as early as six months to a year before the launch. I just wonder if you can give us some color without giving us exact timing, obviously, as to the strategy you’re thinking is?

Strauss Zelnick

So we’re not going to announce it, we’re not going to announce when we are going to announce it, and we are not going to announce a strategy about announcing it or about when we are going to announce it either, or about the announcement strategy surrounding the announcement of the strategy.

Arvind Bhatia - Sterne Agee & Leach

Okay. Sounds good, sir.

Strauss Zelnick

Any other questions?

Arvind Bhatia - Sterne Agee & Leach

Last question I guess is on the cash flow -- Lainie, can you talk about cash flow for this year that you were modeling based on the EPS guidance?

Lainie Goldstein

Well, we don’t share our cash flow projections but I can tell you that in Q4, we will be using cash as our release schedule is heavily weighted towards the back end of the quarter and we will be collecting the cash on those sales in Q1 of next year.

Arvind Bhatia - Sterne Agee & Leach

Great. Thank you.


We’ll take our next question from the line of Benjamin Schachter with Broadpoint.

Benjamin Schachter - Broadpoint

A few questions, but hopefully they are pretty quick -- what does the launch of Project Natal and Sony’s motion sensor mean for Take-Two next year and are you guys already working on titles that are going to utilize those capabilities?

And then on the new GTA download, not the packaged goods that is in the stores but the actual download itself, what are the lessons learned from the original [inaudible] in terms of marketing and sales for that?

And then also if you could talk about sports, wondering how pre-orders are looking for NBA versus last year.

And then finally one more -- online packaged good retailers like Amazon, could you talk about the trend lines there in terms of how important they are to the business this year versus last year and where you think that goes? Thanks.

Benjamin Feder

Strauss, why don’t you take the download first and then I’ll --

Strauss Zelnick

Yeah, I mean, I think the lesson learned from our point of view is that we are grateful that we took it on. We were passionate about trying it, it’s a good piece of business for us. It was very highly rated and we now have actually another retail opportunity here. Also another opportunity to expand the audience so consumers will be able to consumer Grand Theft Auto 4, another iteration on a standalone basis either online if they have access to online or in a packaged good. So I think the lessons learned, probably the biggest lesson learned is that it is possible to come out with something very high quality that’s a subset of the original title [and a line extension] and I think the second lesson learned is that one of the biggest shifts in the interactive entertainment business is that now like basically every other entertainment business, there are multiple windows available for an individual product and that will probably change everyone’s view of product creation, line extension and line expansion.

So I think the lessons learned have been good ones.

Benjamin Feder

Yeah, but if I may, Strauss, I think one of the lessons that not just in this download but some other download experiences, it’s clear that retail is the channel for the foreseeable future. Nonetheless, there is a download component to a lot of our games and there will continue to be a download component. The games live online and they live at retail, they live at both and whether that is download first, retail second/retail first, download second or some combination of the two, that’s an area that we are going to experiment with because we are innovating in that area and it’s likely to change from title to title, but everything is going to have a download component, needs to have a download component to it and this is kind of one of the key lessons and we’ll see how -- see how GTA in the retail SKU performs. We are actually pretty optimistic about it and we think it’s terrific value, I mean, for $40, two great GTA games, new content available in retail is an unbelievable value.

And so the downloads help to seed that market and we think will be critically important.

In terms of your other questions, Natal motion sensor, yes, we have dev kits. Yes we are working on them. Obviously can’t comment on games that we haven’t announced but those dev kits are embedded in all of our studios or just about all of our studios and everybody is working with them to try to figure out new ways in which we can innovate and create the kind of content that this company is famous for. So yes, we are working on it.

Sports -- NBA pre-orders, we don’t talk about pre-orders. My expectation is that, and my hope is that NBA will continue to take market share. We think this will -- NBA 2K10 will be a game that we are going to be very, very proud of. We are thrilled by Kobe Bryant not only on the cover but also as a spokesperson. He’s a terrific spokesperson, and not only a great athlete but a great articulator of what the game can be, so we are pleased about that.

Your last question in terms of online packaged goods and trending this year versus last year, it’s a great question. I don’t have the data in front of me but I will tell you that we are seeing, at least in the U.S., a greater concentration at retail, so that the top five retailers are taking more market share and I don’t know that that’s a trend, I don’t know that that’s -- the significance of all that but we are seeing some data that shows that -- again, kind of too early to kind of call a trend but would not surprise me to see further concentration at retail.

Benjamin Schachter - Broadpoint

Great, thanks for answering all of the questions and good luck.


We’ll take our next question from Mike Hickey.

Mike Hickey - Janco Partners

Thanks, guys for taking the quick follow-up -- can you just refresh us on the development of [L.A. Noir]?

Benjamin Feder

It’s in development. Nothing to announce today. And when we have more to announce, we will announce it but we’re continuing to develop it. We think it’s pretty exciting and innovative and when we have more to share, we’ll share it.

Mike Hickey - Janco Partners

And is that still being handled by your Rockstar San Diego Studio?

Benjamin Feder

It’s handled by Rockstar.

Mike Hickey - Janco Partners

Okay. Thank you.

Benjamin Feder

If there are no more questions, thank you all for joining us today. We really appreciate it and we will be back to you in the next quarter. Thanks a lot.


Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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