Take-Two F4Q07 (Qtr End 10/31/07) Earnings Call Transcript

Take-Two Interactive Software, Inc. (TTWO)

F4Q07 Earnings Call

December 18, 2007 4:30 pm ET

Executives

Cindy Buckwalter - Executive Vice President

Strauss Zelnick - Chairman of the Board

Benjamin Feder - Chief Executive Officer, Director

Lainie Goldstein - Chief Financial Officer

Seth Krauss - Chief Legal Counsel

Analysts

Heath Terry - Credit Suisse

Whitney Goldstein - Lehman Brothers

Daniel Ernst - Hudson Square Research

Mike Hickey - Janco Partners

Brent Thill - Citigroup

Benjamin Schachter - UBS

John Taylor - Arcadia Investment Corporation

Doug Creutz - Cowen & Company

Anthony Gikas - Piper Jaffray

Edward Williams - BMO Capital Markets

Edward Urban - Bear Stearns

Evan Wilson - Pacific Crest Securities

Adam Knowle - Cowen & Company

Presentation

Operator

Greetings, ladies and gentlemen and welcome to the Take-Two Interactive fourth quarter and year-end 2007 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 today. Today’s call will be led by Strauss Zelnick, Chairman of Take-Two; Ben Feder, our CEO; and Lainie Goldstein, our CFO. We are also joined by Seth Krauss, our Chief Legal Counsel. The 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. Actual operating results may vary significant 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, 2006, and our 10-Q for the third quarter ended July 31, 2007, which are both available on our website or by contacting the SEC.

Now let me turn the call over to Strauss.

Strauss Zelnick

Thanks, Cindy and good afternoon, everyone. Thanks for joining us. I believe fiscal 2007 will largely be remembered as a year in which Take-Two made significant progress on initiatives that will provide a solid foundation for our future. As a result, we’ve begun fiscal 2008 as a stronger organization than we have been in the past, with a sharp focus on being the most creative, the most innovative, and the most efficient company in our industry.

Before I turn the call over to Ben and Lainie, I would like to review some of the reasons why we believe Take-Two is so well-positioned for this fiscal year and beyond. First, we believe we have the strongest portfolio of owned product franchises in our business and at the same time, we’ve expanded and diversified these franchises to include 15 proprietary brands, such as Grand Theft Auto, Bioshock, Midnight Club, Bully, Red Dead Revolver, Manhunt, Civilization, Carnival Games, and others. We also have a promising sports business along with our recent entry into casual games, 2K Play. Perhaps even more importantly, we have the most talented creative teams in the industry. We’re very proud of that.

The recent consolidation activity in this business clearly demonstrates the importance and value of owned intellectual property, the gold standard of our business. We’ve created a more streamlined and efficient organization through our restructuring and revitalization efforts. As a result, Take-Two is sharply focused on our core publishing business and better equipped to support the potential of our creative teams. Coupled with that is a substantially reduced cost structure, the benefits of which will be more fully realized this fiscal year.

We’ve worked diligently to resolve the distractions of various regulatory and litigation issues. Most recently, we announced a proposed settlement of all consumer class action lawsuits pending in the U.S. relating to the so-called Hot Coffee modification. Along with our progress in these and other areas, we anticipate significantly stronger operating and financial performance in fiscal 2008.

As Lainie will discuss in greater detail, we are reiterating our guidance for full year earnings per share in the range of $1.30 to $1.50 on a non-GAAP basis on $1.1 billion to $1.4 billion in revenue. We are also providing guidance for our first quarter.

In summary, we begin fiscal 2008 with great confidence in our competitive position and in our potential for profitable growth. We’ve arrived at this point just as the video game industry is poised to reap the benefits of the cycle that began in 2005. As the installed base of next generation hardware continues to grow and the sales of video games reach new heights, we have the products, the processes, and the people to take maximum advantage of the opportunities in our market.

With that, let me turn the call over to Ben.

Benjamin Feder

I’d like to comment briefly on our Q4 results and the current holiday season and then I’ll elaborate on our accomplishments in a few areas that Strauss just touched upon.

We’re thrilled that our Q4 bottom line performance was better than expected. This is the second quarter in a row that we beat our guidance. On a non-GAAP basis, this is the first quarter in some time in which Take-Two was profitable without a new Grand Theft Auto release.

We beat our guidance primarily on the strength of better-than-anticipated sales on internally developed titles, particularly Bioshock and Carnival Games. Product mix of Jack of All Games was also more favorable as we worked hard to expand margins in that business. As you can tell, the revitalization of Take-Two is well underway.

Looking to Q1, we have a very light new release schedule, with the majority of our business coming from catalog titles, so I view Q1 as a time to prepare for the next nine months of the year, which we expect to see significant growth.

Overall, I’d say the sales trends for holiday 2007 appear to reinforce the overall strength of our industry as video games continue to be among the must-have gifts this season. This bodes well for the long-term prospects of our industry in general and Take-Two in particular.

I’d characterize our performance this season as satisfactory, especially in light of the fact that our holiday sales are primarily driven by catalog titles. But our ambitions are to do much, much better.

Now let me turn to some of our recent product developments. We released new downloadable content for Bioshock, which will make the new game play experience even more compelling than it already is. This new internally owned and developed franchise has shipped over 2 million units and has won multiple awards.

Both the Associated Press and the British Academy of Film and Television named Bioshock Game of the Year for 2007, and at last week’s Spike TV video game awards, Bioshock took home more awards than any other title, winning Game of the Year, Best Xbox 360 game, and Best Original Score. This is a great new franchise for Take-Two, upon which we plan to build.

Rockstar just released Grand Theft Auto: Vice City Stories on PS2 and PSP in Japan and the title achieved greatest hits status on PSP last month. From 2K Play, we’re thrilled with the enthusiastic consumer reception to Carnival Games, a great family title. It was the number one third party Wii title in September, the number two third party Wii title in October, and remained a top 10 title in November.

We’ve already shipped over half a million units worldwide and are seeing sustained demand for the title, and we expect the title to continue to perform well after the holidays. We plan to extend the success of Carnival Games by bringing it to the DS platform this summer.

Moving to sports, the performance at NBA 2K8 was very, very solid. The Xbox 360 title outrated the competition and outsold it by almost three to one in its first three months on the market, according to NPD.

Looking at the balance of fiscal 2008, we’re extremely optimistic. We are eagerly anticipating the release of Grand Theft Auto IV in our second quarter. By now, I hope most of you have seen the third trailer that Rockstar unveiled several weeks ago along with the box art. The game looks terrific and we’re confident that it will be every bit as groundbreaking as the previous titles.

Our strong pipeline for 2008 also includes other titles -- Midnight Club Los Angeles, episodic content for Grand Theft Auto IV, Bully: Scholarship Edition, Sid Meier’s Civilization Revolution, Borderlands, Top Three, and our complete sports lineup. Many of the products in our fiscal 2008 pipeline are sequels to well-established franchises, the prior versions of which sold over 15 million units in aggregate, not counting Grand Theft Auto.

We are very excited about the potential for the 2008 lineup. We have significant revenue visibility with these proven brands.

Among our other new releases, 2K Play recently released the first products from its partnership with Nickelodeon -- Go Diego Go: Safari Rescue and Dora the Explorer: Dora Saves the Mermaids, both on the Nintendo DS. These titles will also be shipping on console early next year.

2K’s new title, Borderlands, was the exclusive cover story in the September issue of Game Informer and is generating additional buzz following the debut of the trailer on Spike TV’s 2007 Video Game Awards. Borderlands has been named one of the top games for 2008 by Electronic Gaming Monthly, Game Pro, and Games for Windows magazine.

Also for 2008, we are looking forward to Sid Meier’s Civilization: Revolution, the game that Sid says he’s always wanted to make. The game was built exclusively for console and handheld platforms and we are bringing it to Xbox 360, PS3, and DS. The title is already getting positive feedback from both consumers and the press after our play test at the E For All Consumer Game Show this past October.

In sports, we’ll be expanding our lineup with Don King Presents Prizefighter, a new boxing title that we announced last week for Xbox 360, Wii, and DS. We are also looking forward to Major League Baseball 2K8 in the spring, with Mets shortstop Jose Reyes as our cover athlete.

Looking into fiscal 2009, the buzz is building already for Mafia 2, the sequel to our 2 million unit bestseller. The title is already generating gamer and press interest after the debut of the cinematic Mafia 2 teaser trailer at this year’s game convention in Leipzig, Germany.

In fiscal 2009, we’ll also be offering additional episodic content for Grand Theft Auto IV in Xbox 360 and you can expect to see sequels of some of our big franchises. You’ll recall that our goal is to balance out the major releases throughout the year and we’ll have more to say about our fiscal 2009 pipeline in the months ahead.

We’ve said a lot about our focus on creating owned intellectual property and we’ve recently established a new studio, 2K Marin, in Novato, California. This studio will develop original IP and also co-develop products with other 2K studios around the world. This move reflects our commitment to create and leverage triple A franchises.

To strengthen our focus on a number of critical operating areas, we recently named Gary Dale to a corporate role as Executive Vice President to Take-Two. In his new position, Gary will head up our efforts to capture opportunities in emerging areas, such as online gaming and casual games, as well as in critical regions of the world, Asia-Pacific and Latin America. His experience and relationships in Europe will also be valuable in continuing to grow our business in that critical market. Gary will also oversee our sales organizations.

We’re thrilled with our Q4 performance and our progress to date. We believe that fiscal 2008 will demonstrate the value of our efforts to revitalize the business, make our organization more efficient, and focus on what Take-Two does best -- creating powerful game franchises. We look forward to reporting on our progress throughout the coming year. Lainie.

Lainie Goldstein

Thanks, Ben and good afternoon, everyone. I’ll be covering several topics today. First, a review of fourth quarter results; second, our outlook for fiscal 2008; and third, our guidance for the first quarter.

Let’s look at our Q4 results. Net revenue was $293 million, compared with $267 million a year ago. We’re pleased that we were profitable in the quarter on a non-GAAP basis and that we exceeded our guidance for a second quarter in a row. This is the first quarter in quite some time that Take-Two was profitable without a new Grand Theft Auto release.

Non-GAAP net income was $3.4 million compared to a non-GAAP net loss of $1.8 million last year, with earnings per share of $0.05 compared to a loss per share of $0.03 last year.

Our GAAP results for the fourth quarter were a net loss of approximately $7 million, or $0.10 per share, compared with a loss of $14 million or $0.20 per share in the fourth quarter of fiscal 2006.

Our GAAP results included $4.8 million in stock-based compensation expenses and a total of $3 million in business reorganization and expenses related to unusual legal matters. Additionally, we realized a $3.1 million loss on the sale of Joytech and a $1.4 million loss on the de-consolidation of Blue Castle Games, a developer of some of our sports titles.

Let me explain that a little bit further. We had previously accounted for Blue Castle as a wholly-owned subsidiary in accordance with FIN-46. While Blue Castle continues to develop some of our sports titles, we are no longer their primary source of funding, which has resulted in having to de-consolidate their assets.

Our increase in revenue year over year was primarily due to strong sales of our newly released titles, led by Bioshock, NBA 2K8, and Carnival Games. Grand Theft Auto catalog sales were also a significant factor in the quarter’s results. Our sports business was once again a strong contributor to revenue. Sports represented about 20% of our publishing revenue in the quarter, and Jack of All Games business also grew, led by strong next-gen hardware and software sales.

Looking at the breakdown of our total revenue, the mix was 75% publishing, 25% distribution, about the same as Q4 of last year. And looking at our consolidated results, our total gross profit margin for the quarter was 30.6%, which was also comparable to last year.

Our split between North America and international revenue was 74% to 26% in Q4. It’s important to point out that our sports and distribution businesses skewed these numbers relative to our peers. These businesses are primarily North American based. If you back out sports and distribution, our North America/international revenue split was about 60% to 40% in Q4 and 57% to 43% for fiscal 2007.

Our operating expenses in the fourth quarter were approximately $87 million, down significantly from last year’s fourth quarter. Operating expenses decreased in all areas except business reorganization, as the restructuring began in the second quarter this year.

Sales and marketing expenses accounted for the largest reduction year over year, due to our lighter release schedule.

Relative to taxes, we are not showing any tax benefit on our losses. As we’ve said on previous calls, due to our domestic cumulative losses for the past three years, we are required to record a valuation allowance to reduce our deferred tax asset. In fact, we had a provision for taxes in the fourth quarter only because we are a taxpayer in some of our international territories.

Our full year results are detailed in the press release but I’d like to just highlight a few areas of our performance.

We successfully initiated a $25 million cost reduction program. We’ll see the full impact of these reductions by the end of fiscal 2008.

We also established two important new franchises with Bioshock and Carnival Games. Our sports business grew 20% year over year for three reasons -- first, the additional titles we released in fiscal 2007 compared to 2006; second, the improved performance of our Major League Baseball title; and third, the higher average software pricing relating to the larger installed base of next-gen hardware.

While sports was not profitable in 2007, we significantly improved the bottom line performance of the business this year.

Lastly, we showed revenue diversification in 2007 as our top 10 titles were 27% of total company revenue, down from 38% in fiscal 2006 and 48% in fiscal 2005.

These accomplishments demonstrate the progress we’re making on our strategic objectives.

Moving on to our balance sheet, as we announced last month, we expanded our credit line to $140 million in November. The expanded line provides additional flexibility to help continue to fund our working capital needs during the busy holiday season and beyond.

At the end of Q4, we had approximately $78 million in cash and $18 million of borrowings on our credit line. Based on our forecast of caps needs, we expect to draw down on the line further in our Q1 but we anticipate no near-term need for additional capital beyond the credit line.

Our accounts receivable reserve was about $63 million at the end of the quarter. This represented approximately 38% of gross receivables. Inventories at the end of the quarter were approximately $99 million, which is relatively comparable to Q4 of last year.

The increase in our software development costs and licenses is primarily related to the key titles planned for release over the next 12 to 18 months. This includes Grand Theft Auto IV, Midnight Club Los Angeles, and Borderlands. We currently have approximately 30 titles in various stages of development.

Now for our outlook for fiscal 2008. First, before we get into the guidance details, I would like to emphasize that we are providing guidance on a non-GAAP basis, which we believe best represents our operating performance. It is also consistent with the way analyst estimates many of our major competitors are afforded on First Call, excluding stock comp expenses and any unusual charges.

In contrast, the First Call estimates for Take-Two historically have been GAAP estimates, making it difficult to apply a consistent valuation to companies industry-wide. Going forward, we would encourage all of the analysts to provide First Call and other reporting services with non-GAAP estimates for Take-Two, just as you do for our industry peers.

For fiscal 2008, we are reiterating the guidance we previously provided in September of $1.1 billion to $1.4 billion in revenue, and $1.30 to $1.50 per share on a non-GAAP basis. The assumptions underlying that guidance were provided in our Q3 conference call on September 10th and those assumptions are still valid today.

Lastly, we are issuing guidance today for the first quarter. We expect a non-GAAP loss per share in the range of $0.50 to $0.60 on $175 million to $225 million in revenue. This excludes stock-based compensation expense of $0.07 per share and reorganization costs and expenses related to unusual legal matters of $0.02 per share. Our Q1 guidance reflects tax expense attributable to the company’s international operations only.

Let me describe some additional data points on our Q1 outlook. We expect our revenue mix to be split equally between publishing and distribution, due to the seasonal ramp-up in Jack’s business and the increased demand they are seeing for next-gen hardware and software. We also expect Jack sales to increase from Q4 to Q1, although we anticipate a decrease compared with the first quarter last year.

For publishing, most of our business is coming from our catalog titles rather than new releases, so we are also expecting our publishing business to be down year over year in Q1. This will result in reduced gross profit margins compared to Q1 of last year. In fact, we expect Q1 gross margins to be closer to what we experienced in fiscal 2007, about 25%.

We expect margins to trend back up in Q2 with the release of Grand Theft Auto IV and then for the full year, we continue to expect gross margins of approximately 35%.

We expect overall operating expenses to trend up a bit in Q1 as compared to Q4, primarily driven by higher marketing spend as we prepare for our big 2008 releases. We also expect to see R&D expenses increase in Q1 as compared to Q4, due to lower software capitalization rate during the holiday season and some incremental IT spending.

G&A should also trend down modestly from Q4 and depreciation and amortization should remain about flat.

As for taxes, we expect to show a provision for taxes in Q1 for our international business only.

While it’s early to talk about fiscal 2009, we can tell you that we are building another robust release schedule. We are planning sequels to some of Rockstar’s and 2K’s triple A brands and we’ll also deliver additional episodic content for Grand Theft Auto IV on Xbox 360. Rounding out our lineup will be our current sports business and titles based on several new brands. 2009 will also reflect the first full year of our cost savings initiative. We are optimistic about our future and the opportunities to further build shareholder value.

At this point, I’ll turn the call back to Strauss.

Strauss Zelnick

Thanks, Lainie. Let me conclude by saying that we are pleased with our progress during what was both a challenging and rewarding year for the company. Building and managing Take-Two is a team effort and I want to thank all of our colleagues here for their hard work and their dedication. We are all very excited about the year ahead. We believe we are extremely well-positioned across the board for growth and improved financial performance in fiscal 2008 and beyond.

We will now take your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Heath Terry with Credit Suisse.

Heath Terry - Credit Suisse

Great. Could you give us a little more detail on the components of getting the sports business to profitability? How much of it is additional titles and the mix versus lower development costs or even lower royalty costs, in some cases?

Lainie Goldstein

Well, our profitability expectations are primarily based on expanding our number of non-licensed sports titles, including Top Spin for Tennis and Don King Presents Prizefighter, and we’re also assuming higher average price points and a larger installed base of hardware.

Heath Terry - Credit Suisse

Can you give us an idea of the number of sports SKUs that you’ll have this year versus last year when you talk about that expanded title lineup?

Lainie Goldstein

We haven’t shared that information yet, Heath.

Heath Terry - Credit Suisse

Okay, great. And then, to the extent that there is any kind of non-traditional revenues in the guidance for next year, whether it’s in-game advertising, downloadable content, obviously you’ve got the relationship or the deal with Microsoft on the downloadable content for GTA. Can you give us an idea of what component you expect that to be next year?

Benjamin Feder

We’re really not breaking that out but I think this is still a time -- for most of what you just described, I think we’ve said repeatedly we’re really interested in expanding that area of revenue, diversifying our revenue base, and we’re pretty interested in building businesses like the micropayments business but it’s very early days for that business.

Heath Terry - Credit Suisse

Okay, great. Thanks.

Operator

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

Whitney Goldstein - Lehman Brothers

Thanks for taking my question. This is Whitney Goldstein. I’m just actually on the road right now. My question is regarding the hiring of Gary Dale. How do you expect your marketing efforts to change? Is he going to be working on -- I know he’s working with sales to focus on a specific genre like the sports titles or it is overall strategy or is there anything we’ll see different in terms of your marketing efforts of that new hire? Thank you.

Benjamin Feder

It’s overall oversight on the sales organization but in addition to that in terms of new revenue, we’re highly focused on emerging markets, highly focused on Asia and certain markets in Latin America, specifically Brazil and Mexico. And he’s going to be leading our efforts on the business development front around the world.

Whitney Goldstein - Lehman Brothers

Okay, great. Okay, thank you very much.

Operator

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

Daniel Ernst - Hudson Square Research

Thanks for taking the call. Two questions, if I might; one, just looking at the pipeline for fiscal ’08, you commented about what you might have on the Wii front, given the success there. It looks like your Wii space is a little light relative to other titles you’ve announced so far.

And then secondly on advertising, as you are approaching the launch of your big game for the year, can you talk about how your advertising spend will ramp, your marketing spend, and how that might be different this time around versus last, where you have a lot more opportunity for online advertising -- that is not, you know, your advertising online and doing advertising and demos and trailers on the consoles themselves that wasn’t really available in the last gen. Thanks.

Benjamin Feder

Thanks, Daniel. With respect to your first question on the pipeline, we have seven titles on Wii. We’re pretty proud of that, actually. We’ve turned this company from a non-Nintendo shop into a shop that’s focused as much on Nintendo as it is on every other platform. Just to name a few, Bully is coming out on Wii, Prizefighter will be coming out on Wii. And actually, we think prizefighter as a boxing game is actually a pretty compelling game on the Wii.

And it’s not just the Wii. We are also focused on the DS. As we said, Carnival Games will be coming out on DS and so we are pretty excited about that and as I said, we have a pretty good track record on the Wii and we tend to exploit that.

So I wouldn’t characterize it as light. I would characterize it as perfectly appropriate.

With respect to launch and the advertising budgets, you know, it’s really kind of case by case. Some titles will be more appropriate for traditional marketing and some for traditional advertising channels and other products are more appropriate for online and alternative advertising channels. It’s really kind of case by case.

I will tell you that both Strauss and I review the marketing plans of each and every title with a great deal of detail. And by the way, we don’t always -- I wouldn’t say we don’t always agree but there is a healthy debate on where the advertising dollars should be spent and there is a pretty robust conversation that goes on internally about that.

Daniel Ernst - Hudson Square Research

Sure, but if you look at GTA in particular, which obviously has some notoriety around it and it maybe doesn’t need a whole lot of advertising. Maybe talk strictly about the plans -- not specifically but in general terms about how advertising and marketing for that launch will be different than this time last time.

Benjamin Feder

If you are asking whether we should reduce our marketing expense for Grand Theft Auto, I don’t believe that’s the best thing for the franchise. I don’t think anybody internally believes that’s the best thing for the franchise. In fact, we’ll be spending a healthy marketing budget to promote that and promote it on a worldwide basis.

And by the way, I think the trend is heading there too. You just need to look at Halo 3’s budget, for example, and that tells you the whole story. So I don’t think this is a game where we are just going to try to get out and take advantage of the existing brand recognition and just try to launch a game on the cheat. We’re going to launch a game in the way that’s appropriate for the franchise.

Daniel Ernst - Hudson Square Research

Thank you.

Operator

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

Mike Hickey - Janco Partners

Thank you. Congrats on the quarter, guys. Curious on GTA IV; do you have any sense of how the sales of that game are going to spread across your three quarters of your fiscal ’08 period? I’m guessing most will be up-front but any color on that would be great.

And then for your GTA, your last GTA IV trailer, do you have any data points in terms of the amount of hits the trailer got in the first week or so that you could share with us?

And then the last question, taking a look at your sports business, I think Blue Castle did code for your biggest game. Do you plan to extend that license across other games like you did in fiscal ’07, like The Bigs or MLB Power Pros?

Benjamin Feder

I’m not sure -- well, let’s take the first couple. In terms of the spread of sales, that’s not really something we discuss and if history is any guide, and obviously we have very high expectations for Grand Theft Auto IV, we certainly expect this title to keep selling for some time but I don’t think it’s appropriate to talk about how we spread out the expectations except that they are meaningful.

Strauss Zelnick

I would say that we’ve said in the past, I think it’s still true that when it was scheduled for release in October, that was probably a shorter window to spread over the sales because you hit the Christmas season, so our view remains unchanged from that, which is to say that you would expect to sell the same number of units but over a longer period of time than we would have seen had it shipped in October.

Mike Hickey - Janco Partners

Okay, and then on the trailer that you just put out, do you have any data points for us in terms of --

Benjamin Feder

Our sense is that it’s been very popularly received but we don’t specifically share exact data points. But if you haven’t seen it, it’s worth -- I’ll give you the plug; it’s really fantastic. It’s certainly worth watching.

Mike Hickey - Janco Partners

No, I’ve seen it about 10 times.

Benjamin Feder

Good. Then you know. That would be about 20 minutes of your time.

Mike Hickey - Janco Partners

And then I think Blue Castle --

Benjamin Feder

I didn’t follow the question on Blue Castle.

Mike Hickey - Janco Partners

You’ve extended the MLB brand across different titles, the main one, of course, then Bigs and Power Pros. And looking at the rest of your titles through your fiscal ’08 period, I don’t see The Bigs or MLB Power Pros. I’m just curious if your philosophy has changed there or are those -- are they going to be there?

Benjamin Feder

We have a commitment in our baseball genre. We are kind of committed to send it over a number of SKUs. You could expect to see that on some of our other sports titles as well. I think generally the philosophy of Take-Two is to extend our brands over a number of different platforms as opposed to being narrow in our platform focus. But certainly in baseball, we are highly committed to extending the brands to multiple platforms.

Mike Hickey - Janco Partners

Okay, and then the last one, on Midnight Club, is this a game that you guys can come out with annually? I mean, you’ve kind of skipped it but it seems like if you look at some of your competitors raising games, they have the ability to come out every year. And clearly this is a very popular game and I think it would do well if you could do it annually. Is something in the works or --

Benjamin Feder

You know, I think our view is a little bit different. First of all, we are driven first and foremost by making the best games in the business and you can’t do that on a clockwork type schedule.

I think the second thing is even if we had the ability to do a triple A title annually, the question is how do you optimize the consumers’ desire for a franchise title, the needed development time, and the concern that if you come out too frequently, you run the risk of burning the franchise out. And I think Rockstar particularly has done a terrific job of managing that. In other words, optimizing the required development time against optimizing consumers’ expectations, hopes, and interest.

And what’s -- I suppose you could argue that we leave something on the table by not putting stuff out, like stamping out cookies but that’s just not how we operate around here. Every product is seen as something that’s terribly important to us, it’s key to the company and frankly we look at, and this creates a lot of pressure on our very talented people, we look at each game as a standalone new product that has to be better than the last, and that takes time. And if we can deliver that to the consumers, it’s something worth waiting for and I actually think it enhances the value of the franchise over time and extends its life.

Of course, what that means is and we said this is part of our strategy, is we want to build up further our already leading portfolio of owned intellectual property so that while you can’t count on a release every quarter, and again we’re driven by the quality of products, not our quarterly financial desires, what we’d really like to do is have a release schedule that gets more and more robust and more and more predictable every year. But the way to do that isn’t burning out a franchise that consumers love. The way to do that is develop more great franchises.

And frankly, we’ve shown -- not to overstate the case, but I think Bioshock puts a fine point on that. That looks to be another strong repeatable franchise. We certainly feel that way about it.

Strauss Zelnick

There isn’t a piece of us, I mean, your question, Mike and the earlier question I think from Daniel, there isn’t a piece of us that wants to harvest any of these franchises and sort of say okay, let’s turn off the marketing and let’s just harvest what we can in terms of cash. It’s not what we are about. It’s not what the company’s about. We’re building up IP and we’re building up franchises.

Benjamin Feder

And doing it based on quality and meeting consumers’ desires. We’re trying to delight our consumers.

Mike Hickey - Janco Partners

Thank you very much, guys.

Operator

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

Brent Thill - Citigroup

Thanks. Can you give us a sense of what percent of the revenue today is owned IP and where you would like to see that over the next year?

Benjamin Feder

I think the answer is about two-thirds internal and about one-third external and that roughly tracks, but not entirely tracks, owned intellectual property. But it’s certainly our strategy to own our brands.

Brent Thill - Citigroup

Okay. And just a follow-up on Grand Theft Auto, can you just give us your conviction level for the Q2 ship and have you thought about putting GTA on the Wii?

Strauss Zelnick

We wouldn’t say it if we weren’t convicted.

Benjamin Feder

We have a high conviction level and right now I think, no disrespect meant for the platform, but I think there are other titles that are better suited to the Wii than Grand Theft Auto IV.

Brent Thill - Citigroup

Thanks.

Operator

Our next question comes from the line of Ben Schachter with UBS.

Benjamin Schachter - UBS

A few follow-ups on the marketing; anecdotally, it seems that there’s more TV coming out for Bioshock recently. I was wondering if there was anything you learned from that that will relate to GTA marketing?

And then also, do you expect to get any significant or how significant marketing support from the hardware companies for GTA?

And then finally on GTA, do you expect to have a higher priced collection edition of GTA? And if so, what percentage of sales could that represent? Thanks.

Strauss Zelnick

I think each product stands alone and you try to optimize the marketing, as Ben said. This is an interest that’s near and dear to our hearts so we could wax eloquent, but in a nutshell we went back on television with Bioshock because we thought there was a terrific opportunity for the holiday season and we have reason to believe that will be successful.

I’m not going to tip our hands on the GTA IV marketing plan. As Ben said, it’s a very robust plan. We are taking nothing for granted. The fact that you have awareness, you still have to do it in a way that is consistent with what consumers expect and the image of the brand and I believe we will come out with a very, very creative plan. But it doesn’t -- it won’t track the Bioshock plan. Each one stands alone.

In terms of hardware support, we have a close relationship with the hardware licensors, very close relationship. We know they are obviously interested in building up their platform’s success level but we don’t talk specifically about our confidential discussions and agreements with them.

Benjamin Feder

Two more points -- you’ve got to bear in mind that Bioshock was released in a window that was just prior to Halo 3, and so it’s not like we’ve increased our marketing. That was always the plan to have the one-two punch, give Halo 3 the air that it needed and oxygen that it needed and then have a second punch. That was always the plan. The other thing that you’ve got to consider is that Grand Theft Auto is a title that is in a category on its own. When it ships and is supported by television, it’s going to have a pretty wide berth. The industry will give it a pretty wide berth. Bioshock was new IP that needed to start with a core audience and then we extended beyond the core audience.

So they are very, very different titles as Strauss said. Of course we are always learning. I think one of the things we’ve subscribed to do since we arrived at the company is to increase learning at the company to make sure that what we do in one title, we take best practices and apply it to other titles and we continue to do that.

But these actually are two different animals.

Benjamin Schachter - UBS

And will there be any type of higher priced collector’s edition that could make up a meaningful percentage of sales?

Benjamin Feder

We don’t have a percentage of sales. In any event, it would just be a budget number, not an actual number by definition, but there will be a special edition.

Benjamin Schachter - UBS

And the last question, given Carnival’s success, does that change your Wii development strategy?

Benjamin Feder

We are -- it doesn’t change the Wii development strategy because we’ve always been committed to the Wii. Since it arrived, we were committed to the Wii and to the DS. Does it change our view of what a family oriented title can be, of that genre and that production value? Absolutely.

Strauss Zelnick

In a very positive way.

Benjamin Schachter - UBS

Great. Thanks a lot.

Operator

Our next question comes from the line of Doug Creutz with Cowen & Company. Mr. Creutz, your line is open. Our next question comes from the line of John Taylor with Arcadia Investment Corporation.

John Taylor - Arcadia Investment Corporation

I gather you would have given us a date if you wanted to when GTA is going to ship. I wonder, have you picked a firm date or are you being vague with everybody on that?

Benjamin Feder

We’re really not being vague. We’re just confirming second fiscal quarter. I understand that’s a three-month time span but we’ll announce the date when we’re ready to announce the date and tailor our marketing plans accordingly.

We’re really not intending to be vague. We’ll announce the date when we have the date.

John Taylor - Arcadia Investment Corporation

Okay, so does that imply you don’t have a specific date even internally at this point?

Benjamin Feder

Yeah, I’ve probably pretty much said everything I’m going to say on it.

John Taylor - Arcadia Investment Corporation

All right. And then on the -- I wonder if you could talk a little bit about Jack of All Games. What are you guys seeing in terms of deals or potential deals that might become available from publisher over-builds, whatever, going into the first quarter? Can you characterize that opportunity for us?

Benjamin Feder

It’s a great question. I think we all are eagerly awaiting to see what happens post-Christmas. There is I think probably some over-build in certain areas, certain genres, certain platforms. I think it’s a terrific opportunity for Jack and we’ll be pursuing that at the right time. It’s a little too early to tell but that’s actually something that Jack excels at and we’ll be looking at that very, very carefully. It’s a great question.

John Taylor - Arcadia Investment Corporation

Okay. All right and then Lainie, do you happen to know what the inventory distribution is between Jack and the publishing side?

Lainie Goldstein

Sure. It’s about 70% distribution and publishing is 30%. That’s the mix.

John Taylor - Arcadia Investment Corporation

Okay, good. And the last question, if you add together your amortization of development costs in the P&L in fiscal ’07 and add to that R&D and then the increase in capital development costs, you come up with whatever it is, a couple hundred million dollars. I wonder, can you give us -- can you characterize kind of what you expect the total cash spend on product development to look like if you use all those accounts by the end of the year, by the end of the next fiscal?

Lainie Goldstein

I don’t have that in front of me and we really have never shared that before, so I can’t give you that information right now.

John Taylor - Arcadia Investment Corporation

Directionally -- flat, up, down?

Lainie Goldstein

I don’t have it. Sorry.

John Taylor - Arcadia Investment Corporation

Okay. Thank you.

Operator

Our next question comes from the line of Doug Creutz with Cowen & Company.

Doug Creutz - Cowen & Company

Hi. Sorry about that. We had a little phone glitch. It looks like GTA IV has been given a rating in Australia. I guess first, could you confirm that? Second, what went into that process? What did you have to show them and has it been approved for both the 360 and the PS3 platforms? Thanks.

Benjamin Feder

I can confirm that we received an M15-plus rating in Australia. It’s the same rating, by the way, that we received on Grand Theft Auto: San Andreas. Typically we will submit the rating to Australia earlier than other territories and the rating -- there’s a rating package that goes, that typically is submitted to the ratings board in every individual country and it includes a bunch of documentation, a reel of the game, all the stuff you’d expect in the ratings. There’s nothing special required on that basis. And the rating is fully what we had expected and we are very pleased to see it.

Doug Creutz - Cowen & Company

I guess my question, did they have to see a final build of the game to give it a rating or was it just a selection of stuff from the game?

Benjamin Feder

They have to see a substantially complete game. That’s not to say that we can’t alter it once we receive the rating. We can continue to polish the game.

Doug Creutz - Cowen & Company

Okay. Is an ESRB rating a gaiting item for you guys to determine a final ship date?

Benjamin Feder

An ESRB rating is a gaiting item for every game to get the final ship date.

Doug Creutz - Cowen & Company

Well, I guess to announce the final ship date. Let me clarify that.

Benjamin Feder

I don’t think -- no, I don’t think we would wait for the ESRB to announce a final ship date, no.

Doug Creutz - Cowen & Company

Okay. Thank you.

Operator

Our next question comes from the line of Tony Gikas with Piper Jaffray.

Anthony Gikas - Piper Jaffray

Good afternoon. A few questions; could you let us know what’s in your plan for next year in terms of stock-based comp and one-time items, just to reconcile the GAAP and non-GAAP? And second question, any update on potential realignment of comp plans at Rockstar studios? And the third question, can you help us with a tax rate on ’08 and ’09?

Lainie Goldstein

Well, we have for the full year for 2008, we have $0.45 of stock compensation and $0.07 of unusual business reorganization charges and legal matter expenses. That’s the first part of your question, Tony. What’s the second part?

Anthony Gikas - Piper Jaffray

The second part is any update on the potential realignment of comp plans at Rockstar and then tax rate for ’08 and ’09.

Benjamin Feder

We don’t have any updates about our internal comp plans and as you know, anything material, we take great pains to announce as soon as we have news.

Lainie Goldstein

And for the tax rate, we announced on our call, the Q3 call, I think a dollar amount specific to fiscal year 2008 for taxes and that number has not changed, and it’s for our international business, where we are a taxpayer. But in the U.S., we’ll continue to not be a taxpayer and we will also in 2009 anticipate not being a taxpayer in that year as well.

Anthony Gikas - Piper Jaffray

Okay. Thank you.

Operator

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

Edward Williams - BMO Capital Markets

Just a couple of quick questions for you; first of all, with regard to your R&D headcount, can you give us an idea as to where you ended the fiscal year and how you expect that headcount to change throughout 2008?

Lainie Goldstein

We have currently 1,200 as of the end of 2007. I don’t have a 2008 number in front of me. We can get that number and we can get back to you on that.

Benjamin Feder

I think you can safely assume it’s going to grow. We are growing our business.

Edward Williams - BMO Capital Markets

Okay, and along those lines, how significant do you think 2K Marin should be?

Benjamin Feder

I think we have great hopes for it. It remains to be seen. It’s obviously a key part of the strategy. It’s going to work on its own intellectual property and work with other studios around the world. We think it’s a very positive step, particularly because we’ve moved senior management out to Novato.

Edward Williams - BMO Capital Markets

And then looking at your ’08 release schedule, can you give us any granularity as to which quarters you expect some of these titles to ship?

Benjamin Feder

Not yet. It’s coming.

Edward Williams - BMO Capital Markets

Okay, and this may be another one that’s coming but can you give us an idea as to when it may be coming -- the business model around the episodic content for GTA IV, is that something that we could get some color on as soon as when GTA IV ships or as far away as when the episodic content is available?

Benjamin Feder

I think we -- you know, we’re pleased that we beat guidance two quarters in a row and we take great pains not to particularly because of how this is all developed. We now take enormous pains to make sure that we don’t disclose forward-looking concepts before we’re highly confident that we understand where things are going.

So we are not trying to be coy but if we are not going to tell you something then we are also not going to tell you when we are going to tell you. When we have the news, we’ll share it with you.

Edward Williams - BMO Capital Markets

Okay, so that’s a TBD at this point. And then looking at your international publishing in 2008, can you give us an idea as to what percentage of your publishing revenue you think will come from international markets?

Benjamin Feder

We don’t disclose this in the 10-K generally but I would say when you look at international, it’s important to break out the sports business versus everything else, because sports is primarily a domestic business.

I don’t have exact numbers here for you but I’ll tell you, rule of thumb for non-sports business is about 50-50.

Edward Williams - BMO Capital Markets

Okay, and then, looking at Jack’s and the inventory that you have there, what’s your thought? Are you comfortable with the inventory levels at this point or is that still a focus point in terms of reducing your inventory?

Benjamin Feder

Well, at this point it’s peak season, so it’s appropriate for where it is but I’d like it to be lower because it’s a big number. But it is appropriate for where we are in the season and we are -- we scrub inventory on a quarterly basis. I’m comfortable with what the number is and just as an operational matter, we strive to get working capital down to as low a number as possible.

Edward Williams - BMO Capital Markets

All right, great. Thank you.

Operator

Our next question comes from the line of Edward Urban with Bear Stearns.

Edward Urban - Bear Stearns

Good afternoon. Thanks for taking my questions. First, I was wondering, your fiscal ’08 EPS or gross margin guidance, rather, is slightly higher than we saw following the prior GTA release. What specifically gives you the confidence in being able to achieve that margin?

And then secondly, recently you mentioned some Nintendo production issues related to Carnival Games. Can you elaborate a bit on the exact issue you are facing there and do you have any visibility at this time into when supply will improve there?

Benjamin Feder

I think our margin is simply a broader mix of internally developed titles. We own the intellectual property and that extends beyond GTA IV. And in terms of availability of product for the Wii, look, you know, this is a high-class problem. When you have a hit title, sometimes it’s hard to keep it in stock and Nintendo is a great partner and we are working together to try to get that product to consumers. The good news is consumers remain very, very interested and we see it’s really an evergreen product.

Strauss Zelnick

By the way, we’ve already begun to see supply ease up.

Edward Urban - Bear Stearns

Okay, and in terms of the gross margin, you mentioned internally developed product and it seems like Rockstar as a percentage of sales will be comparable for this release in the fiscal year compared with the prior release, of the other divisions, were you expecting significant contribution or what releases are you pointing to outside of Rockstar that would drive that margin?

Lainie Goldstein

Our distribution business margin is up as well as the 2K Games, the sports business as well has a pretty strong margin and in the last release, our sports business wasn’t as strong at that time.

Edward Urban - Bear Stearns

Okay. Thanks.

Operator

Our next question comes from the line of Evan Wilson with Pacific Crest.

Evan Wilson - Pacific Crest Securities

A couple of questions for you; first, I’d like to follow-up again on Carnival Games. Give us, if possible, could you give us a feeling of a -- you know, a basis of that 500,000 units that you said had sold so far, what you think the potential for the game would have been if there were no supply constraints? And also, what the sales cycle looks for that game now that it’s been out for a while and there’s some other stuff out there? Do you think that you have still a big opportunity to continue to sell it through the January quarter?

And then on the GTA release, if you could be a little bit more specific around the PS3 and 360 platform. We’ve seen several other publishers decide to do a split release. I know that’s not ideal. Is it something you’d consider, even if it would keep both releases inside the fiscal Q2?

Benjamin Feder

First question on Carnival Games, it’s almost an impossible question to answer because you don’t know -- if a consumer wants a game, it’s not available, you just have no idea whether that game is -- you know, whether they would have purchased that game or not. It’s an impossible question to answer.

Do we think it has legs after January? Absolutely. It’s precisely that title and that kind of title. We think it’s an evergreen title and we’re encouraged by the fact that Wiis will continue to ship through Christmas and beyond. We’re encouraged by the rain check program that they just announced with Gamestop. We think as the installed base grows, it’s only going to be good news for Carnival Games and we think it’s a must have title, so we are pretty excited about it and we think it’s going to extend well beyond this Christmas.

And as I said, we’ll be extending that to other platforms. Yes, it’s a growing franchise with growing characters and we plan to exploit those as well.

With respect to Grand Theft Auto, we’re committed to simultaneously ship PS3 and 360.

Evan Wilson - Pacific Crest Securities

Thanks.

Operator

Our next question comes from the line of Adam [Knowle] with Cowen & Company.

Adam Knowle - Cowen & Company

Thanks, guys. All my questions have already been answered.

Operator

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

Mike Hickey - Janco Partners

Follow-ups, I was curious if you could update us on your cost cutting. I think you were looking for $25 million run-rate by the end of your ’08 period, with a potential for upside. Can you give us some clarity on that?

Benjamin Feder

That’s exactly still accurate. We expect to realize the $25 million largely in its entirety by the end of ’08 and we think there’s further cost reduction to be done, although to be clear, it will not be headcount driven. It will be driven from non-headcount related costs, so really driven from getting the core business more efficient but we don’t expect to do this through headcount reductions. We are really happy with the team and the structure and we are in growth mode.

Strauss Zelnick

Just a little bit of detail, I think we -- we think we’ve got about $10 million in 2007, the rest coming in 2008. It doesn’t include savings from legal costs and we expect those legal costs to go down dramatically as we continue to settle out some of the outstanding litigation. So I would say $25 million is a floor.

Mike Hickey - Janco Partners

Okay, and the legal costs, that was -- was that an extra three to four per quarter, or --

Benjamin Feder

In 2007, we spent $17 million in outstanding litigation and we expect that number to be reduced dramatically.

Mike Hickey - Janco Partners

Okay, great and then the margin on Borderlands, and this an externally developed property, right? So it’s going to be a little bit lower?

Benjamin Feder

Correct.

Mike Hickey - Janco Partners

Okay. And I’m sure, Strauss, you would have pushed a press release on this but SEC and DA investigation, any updates there or any [inaudible] you can give us?

Strauss Zelnick

We don’t have anything more to announce. We are doing the best we can to get those issues wrapped up as expeditiously as possible. As you know, we can put our best forward and we still have to address the internal concerns of those agencies.

Mike Hickey - Janco Partners

Okay. Thanks, guys.

Operator

Seeing as there are no further questions in the queue, I would like to turn the call back to management for any concluding remarks.

Benjamin Feder

Really appreciate you joining us, we feel good about the quarter, we feel good about the way things are going and we feel especially optimistic about the fiscal year that’s ahead of us. Thanks for joining us today.

Operator

Ladies and gentlemen, this concludes today’s teleconference. Thank you all for your participation.

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