動視暴雪 (ATVI) 2003 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to third quarter Activision conference call. At this time all participants are in listen only mode. Later there will be a question and answer section and instructions will follow at that time. As a reminder this call is being recorded.

I would now like to introduce your host for today's conference. Ms. Kristin Southey. Ms. Southey you may begin:

Good afternoon. Thank you for joining us today. I'll start by reviewing our Safe Harbor disclosure and reminding everyone that the statements made during this call that are not historically facts, but forward looking statements. Although the company believes that its plans, intentions, and expectations reflected in such forward looking statements are reasonable, a number of factors could cause our actual feature results to differ materially from those expressed in any such forward-looking statements.

These important factors and other factors that potentially could effect our financial results are decribed in our filings with the SEC, including forms 10K for the year ending March 31, 2002.

Now I would like to introduce Bobby Kotick our Chairman and CEO.

Thank you for joining us today. Net revenues and net income for the quarter and the first nine months of fiscal year were the highest in Activision's history. According to NPD we finished the calendar year with two of the top five video franchises, Tony Hawk and Spider Man. Our results for quarter, however, were lower than anticipated due primarily to more challenging than expected market conditions and some of our own short comings.

We performed slightly better than the outlook we provided in December, and we're a raising our revenue and EPS guidance slightly for the full fiscal year.

Later in the call Ron will review the internal and external factors that contributed to the change in our operating results and provided a more detailed outlook for the future.

We remain enthusiastic about the future, given the

breath of our intellectual property rights, development resources, and the strength of our balance sheet.

Over the past year we acquired a number of high profile intellectual properties and leading development studios. And over the new few years, the combination of these investments should have a positive impact on our growth and margin enhancement programs.

We extended the terms of two of our most important licenses, Spider man and Tony Hawk, which together have generated over three quarters of a billion dollars in combined revenue.

Earlier this month we announced our expanded long term broad based strategic alliance with Marvel enterprises and signed a multi year extension for many of the rights we have successfully commercialized. The expanded agreement grants Activision the exclusive rights to develop and publish video games based on Spider Man, XMen, Fantastic Four, and Iron Man through 2009.

During the quarter we were named the exclusive licensee for Lemoney Snicket, a series of unfortunate events. Our Lemoney Snicket title is planned to coincide with the movie currently at Paramount/Nickelodeon.

Yesterday we announced the strategic multi year multi-property publishing publishes agreement with DreamWorks that grants us the exclusive rights to publish games based on DreamWorks three up coming computer animated feature films -- shark slayer, matagasgar, and over the hedge. We are very excited about these games and the games we're developing based on the sequel to Shrek.

During the quarter we started an exclusive multi title, multi year agreement to publish real time PC strategy games developed by Stainless steel Studios. Stainless Steel is the creator of the very successful PC strategy empire earth, which has sold more than a million units world wide.

In October we added to our product development group, with the acquisition of Luxoflux, the studio behind our million unit selling franchise

vigilante 8. Luxoflux is currently developing two very promising products for us, True Crime and Shrek 2.

We were able to complete all these these transactions and still maintain a strong balance sheet. In fact we found our substantial cash position provides us with a great competitive advantage of the acquisition of both intellectual properties and development resources.

While we are well positioned for the future, we have a cautious outlook for fiscal 04. We've made some adjustments to our relief schedule and improved some of our product development processes which we hope will result in even higher quality, more market appropriate group of products.

Our line up strikes a balance between proven properties like Doom 3 and original propositions like True Crime and Pitfall Harry.

As we look at fiscal 05 we have a number of mass market appeal products in production including Spider Man, Shrek 2, various Star Wars products and the newly announced Sharks Player from Dreamworks. The target demographics for these properties coincides with the mass market phase of hardware cycle which we believe will materialize in our fiscal 05.

We have a long history of revenue growth and operational success. As we further focus on high quality preach development talent and high impact intellectual properties, we remain very enthusiastic about our long term prospects.

Ron Doornick will now share with you the highlights of and provide an updated outlook for the future.

Thank you. For the December quarter net revenues were $379 million, up 7 million over last year. That income for the quarter was $44 million, up 5 million or 13 percent versus last year. Earnings per share for December quarter were 63 cents versus 66 last year. For the first nine months of the fiscal year net revenues were $739 million, up 118 million or 19 percent over last year.

Net income for the first nine months was $74 million, up 33 million or 79 percent versus last year and deluded earnings per share were a dollar 6 percent 73 cents last year.

We entered the December quarter the video game market had posted a very strong September quarter and we were expecting a solid holiday season for both market and Activison. The market started strong in October but that hit the bricks pretty hard in November and December. We believe that general economic conditions, and consumer spending declines as well as fewer shopping days between thanks giving and Christmas all contributed to weaker than expected market.

There were more than 350 new console titled launched into the market place during the December quarter alone. We believe that retail anxiety over deteriorating market conditions combined with major influx of new titles resulted in progressively consearchtive inventory management by our major customers.

It also seemed that consumers were more selective with their discretionary dollars than in past holiday seasons concentrating their purchases in a narrow selection of well known brands.

This environment our two biggest franchises, Tony Hawk and Spider Man faired pretty well as evidenced by the fact that Tony Hawk franchise ended the December quarter as the second largest franchise in the U.S. market place, as measured by M P D and sales of Spider Man came in ahead of our expectation.

Looking specifically at Tony Hawk 4, he held his own for the next generation plat form during the quarter, matching the numbers achieved by Tony Hawk three in the comparable period. Where we did fall short versus expectation was on Tony Hawk 4 for the Game Boy Advance and Play Station 1 platforms. Also not having a Game Boy Color version for Tony Hawk 4 makes comparison to Tony Hawk 3 more infavorable because that particular squad did very well on that platform last year.

The big disappointment for the quarter is that none of the other four console titles we released in the quarter met our forecast. We have done thorough post mortuns on those products and we believe the primary reasons for their underperformance are, one, inadequate product quality and two, limited consumer appeal of the underlying game concepts.

To ensure our future products meet our standards in these areas, we're doing three things -- one, we're increasing the amount of time spent play testing new products. Two, we're conducting more intensive product quality evaluations and three, we're lengthening product development schedulees to allow for November time to make improvements indicated by testing and evaluations.

During the December quarter, our manufacturing and distribution expenses were 54 percent of net revenues, higher than anticipated due mainly to revenue mix differences. Operating expenses, excluding manufacturing and distribution expense, were about 28 percent of revenues, down slightly versus last year. During the quarter we increased our operating margin by 100 basis points to 17.6 percent over last year.

Turning to our balance sheet. On December 31, we had $529 million in cash and short term investments, versus 554 million on September 30. As of December 31 we had 617 million of working capital versus 610 million on September 30.

Recently our board of directors authorized the company to repurchase up to $150 million of shares of its common stock. During the third quarter we repurchased 1,815,000 shares at an average price of about $13.15 per share.

Operating cash flow for the quarter was a positive $27 million despite self large one time payments for longturnm intellectual property rights. The net account receivables balance on December 31 was $158 million, down 45 million versus the same period last year, partly due to the successful negotiation of reduced customer payment terms. The accounts receivable reserve of 77 million was up 25 million versus last year and equals 33 percent of gross accounts receivables. The a s o's were 38 days, a decrease of 12 days versus last year.

The account receivables reserve is up versus last year for two reasons. One retail inventory of our products were higher than last year and two our UK distribution division is continuing to expand its business with large national retail chains which require higher reserve levels.

Inventory at the end of the quarter were $37 million, up about 7 million dollars versus last year, driven primarily by a 6 million increase in distribution inventory. Of the 37 million, 17 million relates to a publishing business which is slightly ahead of the prior year and 20 million relates to distribution business. An increase of distribution inventory is due to increase of third party products. Capitalized software development costs of December 31 were $52 million representing 96 projects in development. Development costs were down 5 million versus September 30. Over 95 percent of the 52 million-dollar balance of December 31 relates to products that will be released in the future.

On December 31, capitalized intellectual property licenses were $53 million, up 8 million versus last quarter due mainly to one time payments made per long term intellectual property rights including the extense of our marble licenses for 2009 and the signing Lemoney snicket and DreamWorks deals.

Now I'd like to share our thoughts on the over all market begging with our hardware estimates. As of calendar year end, 2001, installed base in North America for next generation system including Intel was 15 million units.

At calendar year end 2002, the installed base had grown to 36 million units. We're expecting hardware price declines by the middle of this calendar year at an installed base of about 55 million total, next generation hardware units by calendar year end 2003.

Looking at each system individually, at the end of December, the Play Station 2 at an installed base of a 15.9 mill units in North America ,in line with our expectation. We expect Play Station 2 to continue to sell well into 2003 and at the end of the year with an installed base of 25 million units.

As of the December 31, the GameCube had instaled base of about 3.6 million units slightly below our expectation. We believe that the GameCube will grow to installed base of about 6 million units by year end 2003.

The XBox is continuing to show good consumer demand in the U.S. and with the introduction of XBox live, appears to be gaining some momentum. MicroSoft end of the month of December with an installed base of 4.6 million units. We are projecting that the XBox installed base will grow to about 8 million units by calendar year end 2003.

At the end of the December, the Game Boy Advance had a US installed base of 11.7 million units exceeding our expectation. We expect the installed base of the Game Boy Advance to hit 16 million units by calendar year end 2003. We're excited by Nintendo new Game Boy S P coming out this spring and we believe it the help Nintendo achieve that number.

Moving to software now. We define our market to include all major platforms in north America and Europe but we exclude Japan. For calendar year 2002, the combined north America and European software markets for console, hand-held N T C grew 17 percent, driven by the growth of the installed hardware base coupled with the continued release of high quality software at premium prices.

Since our last conference call we believe general economic and software market fundamentals have weakened and we are revising our U.S. and European estimates down ward. For calendar 2003, we are now projecting growth of 12 to 14 percent for the total console market including software for both the past and current platforms. The combined growth rate for console and hand held market is a projected 11 to 13 percent and adding a flat PC market, the expected combine growth rate for console, hand held and P C have game software is about 10 percent. Again, these growth rates are for north America and European markets combined.

Now turning to financial outlook for the fourth

quarter of this fiscal year. We're projecting revenues of $100 million and loss per share of 15 cents. This is down versus the prior year. Last year we shipped the number of titled for newly launched XBox GameCube hardware systems, including Tony Hawk 3 and reckless for the XBox, both of which performed well.

Our fourth quarter projections are down versus our October conference call due primarily to release schedule changed results from our decision to do more axtenssive play testing and polish our new releases. During Q four we will now have only one new product release, Wrath of Heaven for the Play Station 2, a game that we're very optmistic about. We also expect solid catalog sale in the fourth quarter especially from Tony Hawk, Spider Man and CubeBox

For the 4 quarter, we're projecting manufacturing and distribution costs of 67 percent operating expenses of 49 percent and interest income of 1.5 percent. Effective tax rate 36 percent, basic shares outstanding 64.6 million.

For the full fiscal year ending in March 2003, we are increasing our revenue guidance from $823 million to 839 million, and our earnings per share guidance for 88 cents to 91 cents.

For fiscal 03, we expect manufacturing and distribution costs of 52 percent of net revenues with operating expenses including royalties of 37 percent. we project interest income below less than 1 percent. Fiscal 03 tax rate should be 36 percent, our fully diluted share count 70.8 million.

With respect to software pricing, it is still a risk factor while we expect counsel lauch pricing to hold at 49.99 to at least the first quarter of next fiscal year. We're concern about even faster price declines for second year were under performing titles. Our reserve balances provide for this scenario.

Turning now to fiscal 2004 and the changes we have made to our operating plan.

We want to insure that our product strategies are aligned with the market place and our titles have the necessary amount of time in development. Accordingly, we have made two major changes to our fiscal 2004 strategy and product line up. We have eliminated the number of small non-core projects from our slate and we have added development time to the schedules for many other games to make them better. This has resulted in a reduction in our title line up for fiscal 2004 from 70 titles to 50 titles. Our outlook for fiscal 04 is now $750 million in revenues and earnings per share of 70 cents. The decrease versus the outlook we provided in December is due mainly to reduction of plan titles for fiscal 04 as well as a lower market forecast and increased operating expenses.

For fiscal 2004, we expect manufacturing and distribution costs of 53 percent of net revenues with operating expenses including royalties of 38 percent. We project interest income of a little less than 1 percent. The fiscal 04 tax rate should be 35 percent, and our fully diluted share count 69.9.

Of the 750 million in revenues we expect about a third to fall into first half and two-thirds into second half. Period of time *R for the first quarter of fiscal 2004, we expect revenues of $130 million and a loss per share of 7 cents. We expect manufacturing and distribution costs of 51 percent of net revenues with operating expenses, including royalties of 55 percent. We project interest income of less than 1 percent. The fiscal 04 tax rate should be 35 percent, and our basic share count 65.2 million.

Our drive title for the first quarter is the highly anticipated X-Men2 movie game. The movie is planned for world wide release on May 2nd of 2003. As we did with Spider Man last year, this game will be offered on five platforms and launched world wide ahead of the movie. Two years ago the first X-Men movie was a surprise hit and generated over $300 million at the box office. And the sequel starring Hally Berry could perform even better.

We also expect great boarding unleashed, which is the new name for our wakeboarding game to release

during the quarter -- during the first quarter. As discussing in our October call, we're now branding our actions sports properties for individual in nature.

In addition we plan to release two sequel, Lost Kingdoms 2 for the GameCube and Star Trek Elite Force 2 for the PC.

One of our product launch priorities for the balance of fiscal 04 is return of Pitfall Harry, our favorite proprietary intellectual property. The game is making good progress and we'll continue to test well with customers. We're also have a promising Disney title in development that blends the world of skate boarding with broad range of Disney characters. We expect our Disney Skate Boarding title to appeal to growing base of young consumers. This game is built on the Tony Hawk engine and has been focused through testing very well.

Another key fiscal 04 release is True Crimes treat streets of L A. This game just keeps on getting more and more exciting and continues to receive strong consumer and retailer feed back. We expect True Crime to be one of our best sellers in fiscal 04.

Our action sports line up will be driven by the next Tony Hawk game. In addition we plan to release a Motor Cross game. Motor Cross continues to grow in popularity and we've identified a great concept for that game. Also planned for release in fiscal 04 is Street Groups 2. We will provide more detail about these products in future calls.

Fiscal 04 we will bring two successful PC franchise to the council. We plan to release highly anticipated return to castle wolvenstein on the X box and Play Station 2. We're also bringing soldier of fortune to the XBox later this year.

Over the last two years we're limited our PC releases to only a few very high quality titles. In fiscal 04 our PC slate is larger, driven by a number of proven properties centered around Doom 3, already next year's most anticipated PC title.

Another exciting project is the sequel to Star

Wars Jeddah Out Cast. Additionally we expect to release return to castle wolfen tine enemy territory, the next episode in the series.

In term of new properties for the PC we're looking forward to first infinity war title. The majority of the infinity war team previously worked for electronic arts on the hit title metal of honor allied assault. Also in new development is the first title due out by stainless steel, the highly talented developers behind billion plus unit titled empire earth. We also have other exciting PC products in the works that we will tell you about the future.

In conclusion, as we now look at our fiscal 2004 operating plan, we see a year that has taken a big hit in terms of our slate, which is a direct result of our decision to focus on delivering games that are exceptional quality. This is in our opinion is the right thing to do even though it has a significant effect on next year's numbers. The benefits of the changes we're making will begin to become visible in fiscal 2004 but will really not be fully in place until fiscal 2005. As a result we believe fiscal 2005 has the potential to be a very strong year for us. The fiscal 2005 plan is being built around an incredibly promises slate which includes properties like Spider Man two, Shrek two, shark slayer, quake four, fantastic four, Lemoney Snicket, and triple X. We look forward to showing you these and other products in this year's E-three.

Okay we're at the end of our prepared remarks. Thank you for joining us. We will now open the call up to your questions.

Thank you if have you a question at this time, please press the one key on your telephone. If your question has been answered, or you wishi to remove yourself from the Q, please press the # key. One moment for questions.

First question from Mike Wallace from UBS Warburg.

Couple questions. First, raegarding their Earning, their operating margin looks down a couple of points. Is that a function of revenue mix where there's lower publishing or higher products with royalties or was the outback higher more R&D for most year because you talk about the drop in the margin a little bit.

Yep. You were right on the first staff next year we have distribution about a third of the revenue mix in publishing 2/3. Of course you know the distribution business has a lower margin. So that is a part of the operating margin coming down. In addition, across the board we're seeing some pressure of the pricing front on the publishing side or at least anticipating that and that puts us pressure on the gross margin, which in the aggregate for the company comes down about a point. We also have about a one point increase in operating expenditure year over year combined providing two-point drop in our operating income margin.

Okay. And as far as the games could you talk about which games have been scrapped particularly in the 02 line and regarding some of the big ones you mentioned like True Crime and doom threen and wolvenstein, when are those going to be released.

Okay in terms of what games we scrapped, we got rid of a lot of smaller projects. We're still in the process of [inaudible] some of those fields with people involved. So we're not going to comment on those specifically. But it's about a five or six projects. In terms of the timing of some you our releases we indicated what our first quarter slate is and as we walk toward the rest of the year we have given you a feel for the title stand for the rest of the year and our next call we'll give you more guidance as to the specific timing of the Q two titles.

So [inaudible] is the so everything else may be in June like wolvenstein for the console or True Crime? In other words, you're not going to tell me. Let me ask you one more then. Regarding the extreme sports stuff. In addition to maybe killing off some of those projects, is there anything you do to change Tony Hawk or Matt Hoffman? Is is it something do you to revive that product line.

We talk on our last call we were going to packge our action sport game differently more following the street groups model a game that exceeded our expectations last year making the war stand alone proposition. So we're looking all our action sport along those lines. Every year to Tony Hawk question, I think a great job refreshing the Tony Hawk brand and successfully selling millions of units of course this year once again we are looking to significantly refresh nine Tony Hawk business.

Okay thanks.

You bet.

Our next question from Jeetil Patel from Deutsche Bank.

Couple questions. Looks like in fiscal 03 you had transition in Game Boy Color going away. It looks like lookin into 04 you have play station one market about 40-50 million revenue... that's kind of desapearing. Can you talk about excluding that out guidance what kind of growth are you expecting on the next generation console software side, at least according to the 750 million guideness that you talked about? Secondly, it looks like you released 75 titles this year, you're average title is about eight and-a-half million in revenue per year per title for this year. And looking at a 50 title line up for next year looks like the assumption about 10 million in revenue per title just kind ever back in the over all figures. Is that the same assessment to make that even with the title that you're running with the 50 -- kind of new per title basis that we should still see growth in the business excluding -- looking at title per title basis.

In terms of first question, it will just clarify, were you asking about our market outlook or the revenue split for act vision.

Actually if you could comment on both. I was referring more to just your guidance as it relates to 750 million.

Okay. Our guidance for the 750 includes a little more than 10 percent old generation product. It's going to be virtually all catalog sales. Let's see -- you know the next console represent about between 60 and 65 percent or so. As far as the market is concerned, you know we definitely -- early in 2002, all the way through December we're surprised on the up side by the over platform necessary terms of you on well they continue to cell both hardware and software. During the December quarter, that came to a pretty abrupt halt. It seems like there is so much going on that the market really veered away from the old platform, the retailers in particular are very dramatically and that substantially reduced the amount of business that we generated -- on Tony Hawk four for the play station one flat form.

The packet that you can to go up to the second set of questions that you asked, the math that you did is pretty right. When you cut about 20 titles, you don't tend to cut the big titles but the smaller ones. On a per title basis the numbers are up a little bit. It's around 10 over 11 million if you dried it into the publishes revenues.

If you look at at the industry data play station revenues for the 4th quarter December quarter were down about almost 60 percent year over year. Do you think that retail shelf fell off about 60 percent or was it less or more than that as went through the quarter.

The play station one you mean.

Yeah.

I haven't seen statistices on it at all. We're at this point more or less [inaudible] that does suggest that there was a lot of inventory kind of going on particularly on that platform. Consequently a lot of shelf space lost.

Also if you look at some of the new releases on play station one, most of the primarily new releases were coming out at 29 or 39.99 price points so retailers were not inclined from gross margin stand point to allocate shelf space to those lower priced products.

Thanks.

Our next question from Edward Williams from Girard and Crower.

Good afternoon. Couple of questions. Could you comment on what you're seeing in the European market with regards to hardware installed base at end of 02 and where you see it at the end of 03.

We basically -- as far as Europe is concerned, downward adjustment in our expectation versus what we had about three months ago. I'm talking about the Play Station 2 and XBox, the GameCube and the Game Boy Advance. There are about a 20 million unit installed base at the end of 2002. We previously expected growth of about 34 million during the current calender year. We now think it the grow to about 31 million. Most of the weakness versus our prior guidance is due to the softness of the Nintento platforms.

Okay so that mean that you're guidance on on -- your thoughtes on play staying two and XBox is constant from where you other than two

months ago.

It does. We hope those numbers are flat. Flat versus our prior expectation.

Okay and what are -- have you guy it is made changes to your development plans for Xbox GameCube or Game Boy Advance or allocation of sources for the various consoles.

We eliminated the Cube and [inaudible] suggested we should. Sports titles for example has not done so well. We have a few in the mix that we eliminated. Our focus always is on cross platform development with the lead SKU typically mean the Play Station 2 titles and that has not changed.

Okay and then just looking at the fiscal 04, what are your thoughts as far as the sales composition among the different consoles.

Asking about the market or act vision?

About act vision.

Fiscal 04? We're not yet to give that out. We're still -- we'll give that out on our next call.

Okay great thanks a lot.

Our next question comes from Gary Cooper of Banc of America Securities.

A couple questions on the scrapped titles. Is there any of that of those products have been capitalized interest and if so, how much. Secondly, what happens with those developers? Did you have any of those in house and if you did, where did they go.

These are mostly small projects in the aggregate. It involves about 4 million-dollar amortization charge. That was about 4 million on the balance sheets for the projects that we eliminated. As far as developers are concerned, these projects will all external projects, so [inaudible] simply external deals.

Okay. And two more -- Number one, the retailers I think you suggested seemed to have changed their approach towards inventory, reducing inventory. Do you think that change is permanent and see will see that in ever quarter going forward.

Number two, maybe you can comment on the PC market. It seems like there's a lot more titles and a lot more what I would suggest be very

successful titles coming out in the PC market this year with war craft expansion pack, and maybe half life and some other things? So, could you maybe comment on whether we run into the same problem this year in terms of PC titles getting too bunched up the way we appear to have done with consoles this year.

Okay. First question about inventory management and whether it has change. I think ... I think that issue is certainly not going away today. I think it will continue for a while. I think there is a sort of a balance issue that is a balance of inventory between the three platforms, some older platforms still. An over supply of products for the smaller platforms XBox and GameCube. All issues the retailers are dealing with that they haven't solved yet. I think it's going to take time for the whole market to balance out in this area and for the retailers to loosen up again a little bit, which I think they eventually well but it's hard to predict how long they will struggle with this issue and be very conservative on the inventory management front.

As far as the PC market is concerned we definitely saw a surprisingly bad quarter on the PC side in North America. The PC was down 13 percent in October, November, December quarter. There was a reduction in the number titles that were out there and that's I think we were -- ahead, we's say 10- 15 percent reduction versus 2004, -- 2001 but I also know the X box live may have this a little bit to do with this. Certainly our P C slate for the year ahead is significantly bigger than what it was last year both in terms of number of titles and in terms of quality of titles. So strictly speaking for act vision we're excited optimistic about the PC business next year.

Okay.

Our next question from Heath Terry from C S F B.

Thanks. Of the 73 million dollar change in guidance, can you give us an idea of how much of it was due to revised market expectation and how much of it was the Elimination of the 20 skews.

Okay let me answer is it this way because we really talking fiscal 04. We previously were in October at about a billion dollars in terms of our revenue forecast and now at

750. That's really primarily due to elimination of 20 skews. A little bit due to the lower market conditions about 200 -- about $200 million due to lower skew count at about 50 million is due to the lower market expectation.

Okay and then can you talk a little bit about the -- about the product platform break down of those 50 skews.

Yeah. Let's see, we have 12 skews in the planning for fiscal 04 of the Play Station 2 as well as the X box and the GameCube. That's not to suggest we're doing every project on ever platform, it just happened to work out that way. 12 each. About six Game Boy Advance titles, about eight PC titles and that gets you 250.

Great. Thanks.

You bet.

Our next question from Jeff Lewinsky of Bear Stearns.

Hi. I wanted to ask about Tony Hawk in the December quarter and what you're outlook is for the fiscal year in terms of percentages in terms of revenues.

Tony was about 31 percent of consolidated revenue in the quarter and fisical year will be about 20 percent.

And how about Spider Man.

Spider Man was about seven or 8 percent range for the quarter. For year it will come in about 20 percent also.

Going forward regarding Tony Hawk in terms of the game play for next version from a marketing stand point, are you going to change sort of name of the game in line with what you're doing with Street Hoops and wakeboarding and -- how are you going to make that sort of appeal to the consumer? What are you changing the game to make it better than Tony Hawk 4.

It's too early for us to comment on that. Specifically you will hear more about that at the next conference call.

Okay. And could you just comment about what happened with Minority Report. That was a title out of trail that did Spider Man. What was at retail? What happened at retail, what happened in the marketing game play given that studio has such good marks.

We were disappointed with Minority Report. It is a little bit of an example of something we're not trying to do in the future

in that we ended up with the property assigning the deal too late to be able to release a well produced game day to date with the movie. In fact it was a rush job to get it out with the DVD release. The movie did well at the box office but not quite as well as we expected. We feel we rushed the title out. That was a mistake and we don't want to make that type of mistake again in the future. That's part of the reason where we move so many projects back ward and given them more time to ensure they are high quality.

Of the fiscal 04 revenue guidance changes have any of those projects -- how many of those projects have moved into fiscal 05. Is there anything you can identify specifically.

Yeah, we moved about five or six projects out of this year into next year. Then we moved about 25 or 26 projects out of next year into the following fiscal year. So, we are looking at a very sizable slate already for fiscal 05 the 70 plus skew range.

Okay. Thanks es a lot.

You bet.

Our next question from Stuart Halpern of R B C Capital Markets

I'm curious on the intellectual property license and cap software cash spend front. If you could comment to what you expect those trends to be over the next couple of years.

The next couple of years is a long tievment I will give you a shorter timeframe to think about on the intellectual property front we had a balance sheet of about $53 million on December 31. That was up because we did three significant deals during the quarter as we look to the next quarter, we don't see a significant change in that balance. Accepting that we do a major, which we won't be discussing and we should point so all I can say is our forecast excluding any major new deal will be about flat by the 331 balance. Third cap software we expect of balance of 12/31 about 51 million, we expect that to go up by about -- 15 to $17 million between now and the end of the year. That's of course function of the fact that we're not shipping many titles out this quarter and are continuing to work capitalize expenditures related to all projects that will go out in the future.

OK, then just returning to the IP license. I'm looking for a trend, not specific numbers. Looking out

over more broad in the next year or so, do you expect that higher percentage of important titles for you would be licensed titles and for that as a percent of publishing revenue that line item would be represent a modestly increasing percentage or flat or down ward.

It's really level of detail that we're not prepared to discuss today. At the next call I think we should revisit this.

Okay great thanks.

Our next question from Chris Debiase of Goldman and Sacks.

Thanks. Just another follow up on the IP. Are you seeing more or less competition for the right in the last couple months and has the structure of some of those deals changed whether it's more up front or more over the cost of the course of the titles?

It's always competitive. That certainly hasn't change and it's not a one structure situation. There are many structures that too is not new so I would say it's always competitive and as the industry has grown, certainly the amount of money involved here has risen with the size of the industry, but there isn't a certain "C" change twepment on that front that you can report.

OK. just as a follow up given the three initiative you're doing to get better quality games out and more game play testing, how is the cost per title increased? I'd assume it's to a similar degree mentioned earlier on the revenue and unique per title. Am I thinking about that correctly? ROBERT KOTICK: Yes. The concept is if we do a better job with the quality of the title, will coast more but also yield better in market results in terms of sales. You're absolutely right. What we're doing as a significant effect in terms of cost of game but we expect it to materially improve the results of the product in the market

Okay and then on the 150 million-dollar share buy back. Will you get an update on that quarterly over is that intra quarter.

We will do that again in the next call.

Great thanks.

You bet.

Our last question from Arvind Bhatia from of SWS.

Good afternoon. Just going back to that earlier question where you answered that $10 million per skew versus 8.5, if you look at apples to apples and look at your top 50 titles for 2002, would the math not be there more line 10 million versus 10 million because the top 50 always going to be the bigest revenue generators?. That's my first question then a follow up.

I'm not sure I understand that.

Well, I think you mentioned that the math now for 2003 would work out to about $10 million per title, right. And we mentioned -- we also talked about that compares to 8.5 million for 2002. But that added more skews and also has some of the underperforming skews. So if you were to talk some of those out and look at your top 50 skews, a lot of this will have sequel necessary 2003 and then we compare apples to apples the math would be more the top 50 did better than 8.5, maybe the number is close to 9 or 10 million. Can you comment on that?

I think we have one too many apples in the mix. Here is what we are trying to say. If you look at our past interior four slate, next fiscal year slate, before we did the parameter down and the delaying or pushing back of titles we were a little over billion dollars in terms of guidance and we had 70 title in the mix, now we have 50 title in the mix, meaning there's 20 fewer and that's about 10 million per skew less in the mix and that's how you can understand how we go from a billion to 750 million. 200 of that is skew to lower skew count and another 50 due do lower market.

Right and you understand that. I'm just making a point that are you really viewing a growth in terms of dollar per skew or not because --

You know this is a little bit over the simplified but it's a helpful way for people to put their arms around how it goes. Obviously we try to focus on the big skews and we built our P and L next year from the ground up skew by skew. We just happen to average out numbers set -- can be easily understood that way.

Right. Another question is there any change in terms of accounting policy or practices as a result of what's

happened so far, different titles. In other words you may be capitalizing more conservatively or is there any change in terms of accounting.

No change.

No change. And last question would be looking how you gave some information on fiscal 05, if you are going out that far, can you comment on what your thinking is in terms of the next psychical cycle and the transition and all that stuff. What do you think the next cycle and the transition and all that good stuff. What do you think the next transition is going to happen and anything fiscal 05 product mix reflecting more of the mass market at that point or I guess what are you thinking in terms of the cycle.

I'm not really seeing any material changes in the cycle. We're expecting to see new hardware likely in -- possibly late 05, possibly 06 in our product strategy are more oriented toward the latter part of the cycle.

Okay. One more if I can ask that. You mentioned Tony Hawk being 20 percent over all for year. If you were to look at 03 or your fiscal 04, what do you think that number would be in maybe -- if you want to combine that with other titles like wakeboarding if you have any others in 04.

We will do that in the next call.

Thanks guys.

Thank you.

Thank you all for joining us today. For those of you that have any questions after the call please contact my office my office directly. On behalf of everyone at act vision we appreciate your time today thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may disconnect at this time. Have a good day.