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THQ, Inc. (THQI)

F2Q08 Earnings Call

November 1, 2007 6:30 pm ET

Executives

Julie MacMedan - VP of IR

Brian J. Farrell - President & CEO

Edward K. Zinser - CFO

Analysts

Colin Sebastian - Lazard Capital Markets

Ben Schachter - UBS

John Taylor - Arcadia Investment Corporation

Ralph Schackart - William Blair

Tony Gikas - Piper Jaffray

Brent Thill - Citigroup

Shawn Milne - Oppenheimer

Eric Handler - Lehman Brothers

Mike Hickey - Janco Partners

Justin Post - Merrill Lynch

Doug Creutz - Cowen & Company

Operator

At this time I would like to welcome everyone to the THQ, Inc. fiscal 2008 second quarter results conference call. (Operator Instructions) I would now like to turn the call over to Julie MacMedan, Vice President of Investor Relations. You may begin your conference.

Julie MacMedan

Thank you. Good afternoon, everyone. On today’s call, management will make forward-looking statements and projections regarding our expectations, estimates, and predictions of the future. These statements about our business are based in part on assumptions made by management and are not guarantees of future performance. Therefore, actual results may differ materially from today’s forward-looking statements due to the risk factors that are described in our March 31, 2007 Form 10-K. A copy of this filing may be obtained from our website.

In describing THQ’s financial performance, we will discuss non-GAAP measures, including operating margin and net income. Please refer to the reconciliation of these measures to GAAP results in the tables provided in today’s results release.

On today’s call, Brian J. Farrell, THQ’s President and Chief Executive Officer, will review our first half and will then turn the call over to Ed Zinser, our Chief Financial Officer, who will discuss THQ’s results for our fiscal 2008 second quarter and our guidance for the remainder of fiscal 2008. Ed will also provide our calendar 2007 market growth and hardware platform assumptions. Brian will then close with a discussion of our plans for fiscal 2008 and long-term growth. We will then conduct a question-and-answer session following prepared remarks.

With that I would now like to introduce Brian J. Farrell, our President and Chief Executive Officer.

Brian J. Farrell

Thank you, Julie and good afternoon everyone. On today’s call, I would like to share with you our plans for the second half of fiscal 2008 and how we position the company for long-term revenue and profitability growth. I will begin with a recap of our first half.

As we discussed on our October 22 conference call, during the September quarter we shipped more than 1 million units each of Juiced and Stuntman, yet these titles both fell short of our expectations, impacting our results for the second quarter and our outlook for the year.

On a positive note, during the September quarter we shipped nearly 2 million units of Ratatouille, driven primarily by a strong performance in international markets. The strong global appeal of titles such as Ratatouille, Juiced and MotoGP coupled with our expanded direct sales presence in Europe and Asia drove 40% year-over-year increase in international sales. We expect revenue from new markets in Europe and Asia to continue to fuel THQ’s long-term growth.

As we said on our first quarter call, we believe Nintendo’s new platforms are expanding the market for video games and we plan to continue our leadership on Nintendo’s hardware. During the first half of fiscal 2008, our revenue on the handheld Nintendo DS doubled year-over-year, driven primarily by Ratatouille as well as strong performance from Drawn to Life, a new original game exclusive to the DS. We expect our Nintendo Wii revenues to grow significantly in the second half of fiscal 2008 as we ship our big mass-market brands including WWE, Pixar, and Nickelodeon as well as MX vs. ATV and Destroy All Humans! on that platform.

In short, although the first half of fiscal2008 tracked below our expectations and affected our outlook for the year, as we said on our October 22 call, we have taken steps to ensure that our products compete at the highest levels. These steps include personnel and process changes in product development and quality assurance, a more rigorous product evaluation process and the move of certain titles out of our fiscal fourth quarter to give them more development time.

Now I will turn the call over to Ed to discuss our financial results and forecast in more detail.

Edward K. Zinser

Today I will review our Q2 financial results and reaffirm guidance for the remaining quarters and for our full fiscal year ending March 31, 2008. THQ’s financial results include stock-based compensation expense and the adoption of FAS 123R. As I discuss our financial performance in more detail, I’ll use the non-GAAP numbers, which exclude this expense.

For the second quarter of fiscal 2008, we’ve reported net sales of $229 million and a net loss of $0.03 per share, below our August 1st guidance of $240 million in net revenue and a $0.10 profit. Our miss to the August 1st guidance was due to revenue shortfalls of Stuntman: Ignition and Juiced 2, including increased price protection, primarily for Stuntman. Our prior-year quarter was $240 million in net revenue and earnings per share of $0.25.

Our fiscal 2008 second quarter net revenue was driven primarily by Ratatouille and the releases of Stuntman: Ignition and Juiced 2. In addition, we had solid catalog revenue led by Cars and WWE. The revenue was down slightly versus the prior-year quarter, which was led by Cars, Saints Row, and Monster House. From a geographic perspective, 41% growth in our international business versus prior year could not offset the decline in North America.

Moving on to cost of sales, product costs of 38% of net sales increased 6 points versus the prior-year quarter. The increase was due primarily to price protection on Stuntman: Ignition and Juiced 2 compared to the prior year’s mix of Saints Row on the Xbox 360 at a premium price and a higher gross margin PC product, Company of Heroes.

Software, amortization and royalties of 16% of net sales decreased 2 points versus the prior-year quarter. This was due primarily to write-off in the prior-year quarter. License, amortization and royalty costs of 10% of net sales was up modesty from 9% in the prior-year quarter due to sales mix. As a result, the gross margin after these costs was 36%, down from 41% in the prior-year quarter.

Product development expenses of $27 million were up from $24 million in the prior-year quarter, due to increased product development efforts to support future growth, including the wireless development and our acquisition of Universomo, a mobile developer.

Selling and marketing expenses were 20% of net sales, up from 16% in the prior-year quarter due to the launches Stuntman: Ignition and Juiced 2, compared to the prior year launch of Saints Row, which had first party co-marketing support.

G&A expenses were $13.8 million, down $2.3 million from the prior-year quarter due primarily to lower performance-based competition and professional fees. As a result, our net loss for the second quarter was $2.2 million or $0.03 per share, compared to net profit of $16.4 million or $0.25 per share in the prior-year quarter.

Now, let’s turn to the balance sheet. THQ ended the quarter with $297 million or $4.47 per diluted share in cash and short-term investments. This balance reflects the repurchase of $42 million of stock in the quarter. This quarter end balance was an increase from the $284 million balance on September 30, 2006.

Net accounts receivable of $166 million increased from $110 million at September 30, 2006. Our days sales outstanding on a rolling 12-month basis was 62 days versus 45 days in the prior year period. This reflected the heavy sales late in the quarter this year and a much higher international sales mix in the prior-year quarter.

Accounts receivable allowances were $89 million at quarter end, up from the $78 million balance at September 30, 2006. The coverage on a trailing nine months of net sales basis was 14%, up from 12% in the prior-year quarter end. Inventory was $42 million, up from $27 million at March 31, 2007, but flat to the prior-year balance. On a rolling 12 month basis, inventory turns were ten, up from nine in the prior-year period.

Our investment in licenses of $98 million increased from $91 million at March 31, 2007. This was primarily due to the Disney/Pixar advance, partially offset by the license amortization expense recorded in the quarter for Ratatouille.

As expected, capitalized software development increased to $241 million at quarter end, up from $164 million at March 31, 2007; nearly 60% of the $241 million balance is comprised of titles which are planned to ship this fiscal year.

Property and equipment of $50 million was up $5 million from the March 31, 2007 balance due primarily to development kits in computer hardware and software. Goodwill was $99 million, up from $89 million at March 31, 2007 due primarily to the acquisition of Universomo, our wireless developer, in May of this year.

Total current liabilities were $277 million, up $80 million from the March 31, 2007 balance of $197 million. This balance includes $17 million to Jakks Pacific that has been accrued at the payment rate that expired over a year ago. Until the new rate is determined through arbitration, which we have filed a court action to expedite, this accrued balance will continue to grow but will remain unpaid until the new rate is established, which is expected to be a significant reduction.

In addition, other key increases in current liabilities, due in part to the significantly larger Q2 versus the March 31, 2007 quarter, included product purchases, VAT and inventory. The company’s current ratio is 3:1 with working capital of $504 million, up from $475 million a year ago.

On a rolling 12 month basis, operating cash flow was $29 million, up from the $18 million in the prior-year period.

Return on invested capital on a rolling 12-month basis was 16% versus 13% for the prior year. We had no borrowings at quarter end and total stockholders’ equity was $753 million.

That concludes the financial results for the second quarter of fiscal 2008. Before I discussed THQ’s financial projections for the full year of fiscal 2008 and for the third and fourth quarters, I would like to review some of our assumptions.

Expectations for calendar 2007 software dollar growth for North America and Europe are expected to be north of 15%. There are updates to our hardware projections; most are half a million units up or down, depending upon the platform. Our unit hardware forecast in North America for each platform are as follows:

Xbox 360, 4.5 million to 5 million; Nintendo Wii, 6.5 million to 7 million; PS3, 2.5 million to 3 million; PS2, 3 million to 3.5 million; DS, 9.5 million to 10 million; and PSP, 3.5 million to 4 million.

In Europe and the other territories our forecast for each platform are as follows:

Xbox 360, 2 million to 2.5 million; Nintendo Wii, 4.5 million to 5 million; PS3, 3 million to 3.5 million; PS2, 4 million to 4.5 million; DS 9 million to 9.5 million; PSP 3 million to 3.5 million.

Turning to THQ’s fiscal year 2008, our sales and profit projections remain unchanged from our call of October 22. We are projecting net revenue of approximately $1.06 billion and net income of approximately $0.80 per share excluding the impact of stock-based compensation expense of $0.24 per share.

As we discussed on our October 22 call, the change in profit in revenue versus our August 1 guidance forecast, was due to lower sales and price protection on Stuntman: Ignition and Juiced 2, and tiles moving from Q4 to fiscal 2009.These included De Blob on Wii and DS, Destroy All Humans! on Xbox 360 and PS3 and Frontlines on PS3.

For the 2008 fiscal third-quarter, our guidance remains unchanged from our October 22 call. We expect net sales of approximately $490 million and net income of approximately $0.67 per share, excluding the impact of stock-based compensation expense of $0.06 per share.

Net sales in the December quarter will be driven by WWE on six platforms, Cars: Mater-National and Ratatouille, a solid Nickelodeon line up of Avatar, Nicktoons and SpongeBob and Bratz. The quarter includes increased investment in product development and marketing versus the prior-year quarter.

For the fiscal 2008 fourth quarter, we expect net sales of $240 million and net income of approximately $0.25 per share, excluding the impact of stock-based compensation expense of $0.06 per share. Net sales will be driven by Frontlines on Xbox 360 and PC, Destroy All Humans!, Big Willy Unleashed on Wii and PS2 and continued sales of MX vs. ATV Untamed on six platforms, WWE and Ratatouille.

In summary, in fiscal year 2008 we plan to generate approximately $1.06 billion in net revenue and earnings per share of approximately $0.80.

I would like to turn the call back to Brian.

Brian J. Farrell

Thanks, Ed. We expect a solid second half anchored by proven franchises to drive THQ’s 13th consecutive year of revenue growth in fiscal 2008. We are executing on our proven strategy to deliver our big mass market franchises on the most popular gaming systems for the holiday. Over the past few weeks we released our Nickelodeon-based games, Avatar, Nicktoons, and SpongeBob. Earlier this week, we released Cars 2: Mater-National, a sequel to the top-selling family game of 2006.

On November 13,the release of WWE Smackdown versus Raw 2008 will mark the biggest Smackdown launch in the franchise’s history. We plan to publish the game on six platforms plus wireless, including the Smackdown franchise debut on the Sony PS3, Nintendo Wii and DS platforms.

In mid-December we plan to release to next installment of the number one off-road racing franchise MX vs. ATV across six platforms. This franchise has strong mass market appeal and has consistently shipped more than 1 million units.

We expect our fourth quarter growth to be driven by new releases, Frontlines for the Xbox 360 and PC and Destroy All Humans! for the Wii and PS2. We also expect strong continued shipments of holiday releases particularly MX vs. ATV, WWE and Pixar titles.

Frontlines is a new intellectual property in the competitive but also large and lucrative shooter genre. We believe we have a uniquely-positioned game distinguished by large-scale multiplayer action and open world game play.

Also in the March quarter we plan to bring the Destroy All Humans! franchise to Wii and PlayStation II. Destroy All Humans!, Big Willy Unleashed was designed specifically for the huge audience of casual gamers on those systems. Given the mid-December ship for MX vs. ATV, we expect significant shipments of this title in the March quarter.

In summary, our fiscal 2008 second half performance will be driven by a balanced portfolio of proven mass market and owned franchises released on the most popular platforms with content targeted for the different gaming audiences active on the relevant platforms.

Looking at fiscal 2009, our product pipeline is designed to take full advantage of expected double-digit market growth. Drive titles for the year will include games based on WALL•E, the next Disney Pixar film, our first games based on the Ultimate Fighting Championships and as well as sequels to the popular Red Faction and Saints Row franchises.

Other planned fiscal 2009 releases includes Darksiders, De Blob, Destroy All Humans!: Path of the Furon, as well as games based on our WWE and Nickelodeon brands. With this great lineup, you can see why we’re confident in our ability to increase revenue and profitability in fiscal 2009.

Longer term, we are optimistic about the growth of the current hardware cycle. We have a strong product pipeline of both mass market franchises and owned intellectual properties that are well aligned with the most popular platforms and support our long-term plans for revenue and profitability growth.

We also look forward to continuing to increase our international market penetration and in growing of revenue from digital content creation and distribution.

We now look forward to responding your questions. Operator, please open the call.

Question-and-Answer Session

Operator

Your first question comes from Colin Sebastian - Lazard Capital Markets.

Colin Sebastian - Lazard Capital Markets

First of all, have you determined pricing on the PS2 SKU of WWE at this point? Looking into next year, perhaps how the SKU plan is shaping up on legacy platforms and whether the royalty structure on place on the PS2 might make the economics at lower price points a little more attractive?

Brian J. Farrell

With respect to pricing on PS2, WWE we believe will command a premium price of $49.99, which is where we are pricing that title. Some of our other titles like Cars: Mater-National and a few others will be at $39.99 and then many of our kids titles will be at $29.99.So as usual, it will be our policy to stratify the market in the way we think maximizes our profit opportunity.

With respect to your legacy platform question, we will give you more visibility as to, I presume you mean mostly PS2. We will continue to be active on Playstation 2 next year. We do not currently have any visibility into a revised business model for Playstation 2 but we think given the massive installed base, not just in the US but particularly in some of the developing markets around Europe, there is still a significant opportunity there.

So we’ll continue to ship products for the PlayStation 2 and we will give you more visibility probably later on our next call or two.

Colin Sebastian - Lazard Capital Markets

Given the point in the year in which Grand Theft Auto is launching, does that mean or does that suggest that Saints Row might be a holiday title? Where are you thinking in terms of the year for UFC? Thank you very much.

Brian J. Farrell

I will take the second part of the question first. One of the reasons we like controlling the UFC franchise is because we can plan it around our other major release like the WWE. So you should think about that not when we are going to WWE and probably later than that, although we are not prepared to announce the launch date at this time.

For Saints Row, we think we have got a terrific product that has some very unique and differentiating features. We are not prepared to discuss the launch date at this time. As you know, we try and find the proper launch windows for our titles and you can be assured that we will do that for our Saints Row.

Operator

Your next question comes from Ben Schachter - UBS.

Ben Schachter - UBS

Brian, given a lot of the success you have had with kids’ titles over the years, I was wondering if there was any focus on doing things, PC, casual games around some of the success you have seen on Club Penguin and games like that? If you do something like that, can you do it on your own or are there partnerships you are thinking about there? Just in general with that and the emerging revenue opportunities around some of the online opportunities, what are you doing there? Thanks.

Brian J. Farrell

The online question is obviously a very broad one. To compete directly with things like Club Penguin, I am not sure what our competitive advantage would be there so that’s not an area that we think will be a huge growth opportunity for us. We really like the trends in our digital download business right now on the PC market.

We think the bigger opportunity with respect to online has to do with things like micro transactions and things of that nature, more targeted at the core than casual gamers. The real problem, as you know, with monetizing casual gamers is you either need to have a subscription or advertising model that works and we are not huge fans of either those businesses in their current state.

We like the kid’s business, we think there is a huge opportunity in the traditional console and PC business. But don’t think of us doing anything like as you mentioned, Club Penguin, in the near future.

Operator

Your next question comes from the line of John Taylor - Arcadia Investment Corporation.

John Taylor - Arcadia Investment Corporation

You guys don’t report this number this way, but I am wondering if you could give us a sense of what it looks like? If you put all your product development spending into one basket, whether it’s going on the balance sheet or running through the P&L either in the form of R&D or amortization, I wonder if you could give us a sense of how big that basket looks in total this year, and how you are thinking about it next year? Thanks.

Brian J. Farrell

The easiest way to think about the basket, JT, and you get a little bit of a timing difference if you add the product development expense number to the amortization number on the P&L. Those two would really give you a sense for the size of the basket and you are north of $300 million. So we very much look at that basket of spending on a title by title basis and as we look at embarking on a new title and go through a greenlight process, we are looking at that as an investment opportunity and it has to stand alone on its own merits, both financial and strategic. So that spending of $300 million a year is really not title and SKU basis as it is an individual investment.

John Taylor - Arcadia Investment Corporation

Can you give us a sense of how you expect that might change going into next year? I guess what I am looking for is have we passed the peak of the pain in terms of getting ramped up on 360 and PS3?

Brian J. Farrell

I would say that if you are talking about what it is going to run as a percentage of revenue, yes, I think you are going to start to see it leveling off and declining in the future. Obviously as the installed bases ramp and we get more units sold per title, we start to see more efficiencies in our development areas as we are more familiar when to build tools and tech for next-gen, you should start to see those costs start to come down.

Operator

Your next question comes from Ralph Schackart - William Blair.

Ralph Schackart - William Blair

Can you give us a sense, obviously without giving guidance for ’09, of the angle of trajectory both on the growth and how we should think about the recovery in the margin structure?

Brian J. Farrell

We said on our last call and I think we tried to give some visibility into ‘09, and I probably won’t give a whole lot more, but just to make sure that were clear. What we said in the last call is we expect to be able to grow at above market rate next year. When you look at our line up and you look at the modest growth that we plan to experience this year, we think above market growth is certainly something that you should expect when we give our official guidance for the full year.

With respect to our operating margin, we expect to get back to at least where we were in fiscal ‘07.

Ralph Schackart - William Blair

Can you give us any prospective, some of the discussions that you’re having with retailers at this point, both in terms of how it applies to THQ as well as the overall industry in how they are thinking about this holiday season? Thank you.

Brian J. Farrell

I think in general, retail is reasonably positive, particularly with respect to our sector. We are seeing some nice growth and I am sure some of our competitors may have mentioned this on their calls already. PS3 had a nice little pop after the recent introduction by Sony; we’ve got some good information, although no MPD data on how there has been an uplift in 360 hardware based on Halo 3. So there’s a lot of DS and Wii, I can’t count them out, of course. So I think there is a lot of positive sentiment on the category.

We are very pleased that as usual, in the holiday season, we have big brands that will command more than our fair share of shelf space. So I think the general sentiment so far at retail, especially with respect to our sector, is, I would say, reasonably positive.

Operator

Your next question comes from Tony Gikas - Piper Jaffray.

Tony Gikas - Piper Jaffray

Just looking out at next year with the consensus, actually if you look at the range of estimates, it’s a pretty wide range -- $2.14 to $1.18 in earnings per share -- anything you can do to help us narrow that down a little bit?

Part of that being, should we assume that there are titles that are slipping out of fiscal ‘09, like slipped out of fiscal ‘08 that might need some additional research and development work? Anything you can do to help us tighten that up?

Second question, WALL•E, any early read on that brand at this point and how it might comp to Ratatouille?

Edward K. Zinser

Sure, I will take the first part, and I am sure Brian will give you an update on WALL•E. As far as next year goes, Tony you should know it is a little early to be giving guidance for fiscal ‘09 as we are closing out the second quarter this year. We have tried to give some color to next year. Certainly to be thinking about us, as I said earlier, above market growth rate in terms of the top line and at least back to where we were in fiscal ‘07 on an operating margin standpoint, I think it gives you some at least initial direction.

Certainly we will give much more specific guidance, as we do, in our future call, but I think that should at least give you a sense for where our thinking is today.

Brian J. Farrell

And with respect to WALL•E, we’ve seen a fair amount of that. I don’t know how much you’ve seen, Tony, but once again we think our friends over at Pixar have just nailed it. It looks to be another terrific movie, great story, compelling characters, all the things that you love about a Pixar film.

But what we really like about it is while Ratatouille was another terrific movie, it just wasn’t as videogame friendly as we think WALL•E is, so that’s one point I would make.

The other is the summer movie slate, particularly for family movies, doesn’t appear to be nearly as crowded as it was in this past year, so that should give us a window to have some pretty favorable comps of WALL•E over Ratatouille.

Operator

Your next question comes from the line of Brent Thill with Citigroup.

Brent Thill - Citigroup

Thanks. You alluded to some changes in the studio to better optimize some development cycles, and I’m just curious in terms of if you could elaborate on what changes you’ve been making.

Brian J. Farrell

Well, the things we pointed to in our prepared remarks, we’ve made some personnel changes at a number of levels throughout our PD and QA organization we think will strengthen our structure there.

In terms of process improvements, probably the most significant thing is more frequent reviews by a cross-section of senior management of our titles that are in development, so more high level scrutiny earlier in the process and all along the process, so we think -- and more frequent, both consumer testing, both focus testing and usability testing. Those are the key things and we could go on for a bit, but we’ve put a fair number of things in place in the last 60 days to make sure that our titles do compete at the highest levels.

Brent Thill - Citigroup

Thanks.

Operator

Your next question comes from the line of Shawn Milne with Oppenheimer.

Shawn Milne - Oppenheimer

Thank you. Just a couple of questions. Going back to the comments you just made on making some process improvements, it seems that would take a little bit of time to work out and your next big test in terms of new intellectual properties, obviously Front Lines, can you just talk about how you are viewing that in the model? Do you believe you have expectations that are reflected that it’s new intellectual property? Secondly, Brian, if you can just give us some color on WWE for the holiday. I know it’s on more platforms. Do you expect it to grow year over year. Any kind of color there on pre-orders, et cetera? Thank you.

Edward K. Zinser

I think with respect to how we modeled, we certainly take a hard look at the property and the genre and so forth and obviously work closely with marketing and sales and we’ve planned out a number for Front Lines that we think is appropriate, given that it’s new and given the genre that it competes in. So obviously when we revised guidance and provided that, it’s a number that we feel confident in being able to achieve.

Brian J. Farrell

I don’t know if you subscribe to any of the buzz tracking services, but WWE always tests very well in that regard, so we are really confident in that product. What we really like this year, as we said, is it’s on all platforms so whether that WWE gamer is on PS2, Wii, 360 or PS3 this holiday, we really don’t care. We’re covering all the bases.

So I think just the fact we have all the platforms covered, I think we’ll drive some pretty good growth in that brand this year.

Operator

Your next question comes from the line of Eric Handler with Lehman Brothers.

Eric Handler - Lehman Brothers

Thanks for taking my question. Given the glut of Wii product that has come into the market and Nintendo's tight control of the software manufacturing process, are you finding that you guys are getting all of the inventory that you require?

Brian J. Farrell

One of the things that’s been well-chronicled, Eric, is that Nintendo has some supply constraints both on the hardware and software side. When you have big brands for the holiday like we do, things like Cars Mater-National, which is already launched, WWE which is about to launch, we are getting more than our fair share of mine share from Nintendo. MX, one of our core brands, so we don’t disagree that there will be a fair number of titles that may flounder in the marketplace on Wii this fall just because they don’t have a reason for being, but we will be coming at the Wii market in particular with our strong mass market brands.

One I would particularly watch out for is WWE. That’s getting a fair amount of heat in the marketplace, but we are getting full cooperation from Nintendo with respect to our product line.

Eric Handler - Lehman Brothers

Thank you.

Operator

Your next question comes from the line of Mike Hickey with Janco Partners.

Mike Hickey - Janco Partners

Thanks for taking my question. You mentioned in your comments that you expected significant shipments of MX Versus ATV in Q4. Just curious what gives you the confidence there for additional reshipment over the holiday release.

And if you could speak, I know you did last call briefly, but the margin differential between WWE and the UFC, and if you could clarify whether the UFC is being developed internally, externally. And the last question, the pricing, I know this is the first question on the call but the pricing is about $50 for a WWE on the PS2. It seems a little aggressive in light of some of your competitors’ comments on some key sports franchises that maybe should have been priced at $40, so if you could just reassure us that that price point is going to work in the market.

Brian J. Farrell

The first part of your question again, Mike -- I’m sorry, I’m writing quickly but not that quickly.

Mike Hickey - Janco Partners

All right. The first question was the MX Versus ATV.

Brian J. Farrell

Okay, got it. Just to clarify what we said, it launches in mid-December, MX Versus ATV, and what we said is because of the launch date of mid-December, we expect significant reorders of that in our fourth fiscal quarter.

The experience we’ve had, and if you check the NPD data over the years, MX is one of those titles that is more steady. It is not a huge day one or week one or week two. It’s just a nice, slow steady burn, which is one of the things we love about that franchise, so just for clarity, we’ll put what we think the right amount into the channel is in the middle of December, but what tends to happen is that product just sells, has a very long tale to it.

I’ll speak to you before Ed handles the question about margins for WWE, we spent a lot of time analyzing and researching the $50 price point and we think the WWE consumer is a very avid consumer. We have a lot of data points that point to that. We’ve said a number of times if you think back to the Nintendo 64 era, we actually sold about $2 million units of WWE at $59 when the hardware was $99, so there seems to be a fair amount of price inelasticity.

And what we did say is that we expect this price point to hold through the holidays, so obviously we’ll reassess but we have a lot of research that points to this being the right price point.

I think what also underscores that is our other products are at price points that we think maximizes the sales and profit potential for them.

The UFC developer, we’ve not announced yet, so stay tuned for that. Obviously we want to have a big release surrounding UFC at the right time. Obviously the margins on that title will be -- we think will be very competitive, just because there is only two parties involved.

Mike Hickey - Janco Partners

Thank you very much.

Operator

Your next question comes from the line of Justin Post with Merrill Lynch.

Justin Post - Merrill Lynch

One quick question -- two quick questions for Ed and then a bigger picture for Brian. When you look at the capitalized software development, I think it is up 65% year over year. That’s the short-term number, and the guidance for the back half, revenues are up 17%. So my question is, is that extra expense coming through in the back half? Are you looking for a big title line-up in Q1 of ’09? And then what’s your estimate for the tax rate for the back half of the year, just so we can get to the EPS numbers?

Edward K. Zinser

The cap software development, the number is obviously up significantly, as you would expect it to be in a growing business like ours. I think the right way to think about it, Justin, would be that’s really there to, for the titles that are going to ship in obviously the rest of this year as well as titles in development for fiscal ’09 and even for titles that are in development for fiscal ’10, I think the important point to note is that about 60% of that balance is going to go away in this fiscal year, by the end of the fiscal year and be replaced to a lesser degree by additional investment for titles that are going to ship in fiscal ’09 and fiscal ’10, so what you really want to make sure is that that’s churning and as far as the absolute level goes, we would expect the dollar level to be lower at the end of the year than it is today.

As far as the tax rate, we are projecting about a 30% tax rate on the full year and about 35% for the balance of the year should get you to 30% on the full year.

Justin Post - Merrill Lynch

Okay, great. And then Brian, when you think about the direction of the company, you’ve obviously added a lot of developers over the last couple of years to get ready for this cycle, how do you feel about the company’s ability to really develop competitive IP? And do you think you are a lot better off now that you’ve gone through this cycle, as we look out to the midpoint and then the back half of this cycle, do you really think you can have titles that show up in the 80s and 90s quality ratings? And what do you think your outlook is for next year’s titles in that respect?

Brian J. Farrell

I think the thing I would point to first is as you know, we’ve done it. Company of Heroes I think was the highest rated real-time strategy game in PC history. I think a 93 rating. Saints Row was very highly rated. We certainly are not happy with the review scores of something like Juiced. Stuntman was slightly higher but still not in the range we would like to see, so we’ve done it. We now how to do it and we intend to get back to that.

We think we offer one of the most creative environments for the development community. We are growing our development workforce by being a great place to work for creative people and I think you will see more and more of that as not only this cycle unfolds but the next one.

Operator

Your final question comes from the line of Doug Creutz with Cowen & Company.

Doug Creutz - Cowen & Company

Thanks. Could you talk about what your expectations are for Cars Mater-National relative to your other Pixar branded titles? Thanks.

Brian J. Farrell

As you might know, Doug, we try and do a game sequel to each Pixar film. The experience is the unit sales are clearly down a fair amount from the prior version. For example, when we did The Incredibles 2: Rise of the Underminer, as you’ll notice in NPD, it was well over a million units. So they are off significantly from the film launch versions but they are still over a million units.

Operator

Gentlemen, are there any closing remarks?

Julie MacMedan

I think that’s it, Operator. We would just like to thank everyone for your participation on the call and we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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