美商藝電 (EA) 2005 Q2 法說會逐字稿

Good afternoon, and welcome to the JAMDAT Mobile second quarter fiscal 2005 earnings conference call.

(Operators Instructions)

It is now my pleasure to turn the floor over to your host, Ms. Allyson Pooley from Integrated Corporate Relations.

Please go ahead, ma'am.

Thank you.

Good afternoon, ladies and gentlemen and thank you for joining us today to discuss JAMDAT Mobile second quarter earnings results.

On the call today from the Company are Mitch Lasky, Chief Executive Officer and Michael Marchetti, Chief Financial Officer.

By now, everyone should have access to the press release, which went out today at 1 o'clock Pacific time.

If you have not received your release, it's available on the Investor Relations portion of JAMDAT's website at www.jamdat.com.

Before we begin today, we'd like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995.

The following prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions.

These statements do not guarantee future performance and therefore, undue reliance should not be placed upon them.

In addition, JAMDAT undertakes no obligation to update publicly any forward-looking statements made in today's call to reflect new information, events or circumstances or to reflect the occurrence of unanticipated recent events.

For a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements, we refer you to JAMDAT filings with the Securities and Exchange Commission, including its most recent report filed on form 10K, quarterly report filed on form 10Q, as well as current reports filed on form 8K.

And with that, I would like to turn the call over to Mitch.

Thank you Allyson.

Thanks and welcome to JAMDAT second quarter 2005 conference call.

The second quarter was an important quarter for JAMDAT.

During May and June, we fully integrated our Blue Lava acquisition and the Tetris property into our product slate, re-launching Tetris in Europe, on major US carriers like Cingular and incorporating Tetris into the launch of our retail offering at Radio Shack.

This was a substantial undertaking and our studio, deployment and sales teams completed this integration according to plan.

I am pleased to report that JAMDAT delivered another strong quarter of financial results, revenues were $19.3 million, above our previous guidance, and an increase of 128% from the comparable period last year.

Our quarterly revenues were up 27% sequentially over Q1 2005.

We continue to show excellent earnings growth in the quarter.

Net income was 2.6 million or $0.11 per diluted share.

This GAAP earnings number includes both a substantial non-cash charge for in-process research and development, or IPR&D, related to the Blue Lava acquisition, as well as the benefit related to the reversal of the reserve for taxation.

Adjusted net income, which excludes amortization of stock compensation and other intangibles, and which we believe to be an accurate measure of our operating performance, increased to 7.2 million or $0.30 per diluted share.

Both our GAAP and adjusted net income numbers were above our expectations, and in his remarks later in the call, Michael will explain how to reconcile these numbers with our previous guidance.

We also strengthened our balance sheet in the quarter.

We continue to see positive cash flow, generating approximately $8 million of cash from operations in Q2.

Overall, we were extremely pleased with our ability to maintain hit products in the North American market.

As a result of our continued focus on quality, innovation and world class brands, we believe that we currently have 6 of the top 11 selling games on Verizon, 6 of the top 11 selling products on Sprint and a number of top selling products on Cingular.

We have the number 1 selling game, Tetris, on all 3 of these carriers.

Of particular note is the performance of our MLB 2005 product, which has been the best launch of any sports product in our history, reaching top 5 sales rank on several major US carriers.

As we mentioned in our last call, we have an exclusive partnership with Major League Baseball through the 2007 season.

We believe that baseball is particularly well suited to the display and user interface characteristics of mobile handsets, and we are very proud of our success of our MLB 2005 product.

In addition, we continue to lead the industry in the deployment of successful multi-player games.

We have over 258,000 registered users for our 4 deployed multi player products, Bejeweled, Bowling II, Scrabble and JAMDAT Pool.

For these 4 products, we've hosted over 25 million completed multi-player games.

These games are incredibly sticky.

To put it in perspective the average Bejeweled player has completed over 280 multi-player games.

The average Bowling II player over 35 multi-player games.

We continued our aggressive investment in research and development in Q2.

We are currently in development or commencing development on E3D games to supplement our already robust 2D slate.

Doom RPG, the first product we are launching in partnership with Game pioneers in software had code released the deployment and will be fully deployed for the important 4th quarter selling season.

In addition, we are anticipating the 2005 code release of Silcom III, Scrabble Blast, NFL 2006, NBA 2006, JAMDAT Mahjong, JAMDAT Spades and JAMDAT Casino Deluxe.

We code released over 3000 schemes in Q2 world wide.

Our business is driven by handset launches and we are very excited about what we are seeing on that front.

We have recently seen the launches of the first of several important new handsets, which we've been anticipating for the back half of this year, including the Motorola EH 15 and LG8100 from Sprint, excuse me from Verizon, the Samuel 8300 from Sprint and additional handsets from Cingular, including the Black Razor.

Looking forward, we believe that we are well-positioned to take advantage of increasing momentum through the holiday selling season.

We have a strong upcoming release slated with several multi-territory drive titles.

We are expanding the worldwide distribution footprint for Tetris.

We continue to improve our ability to deploy our products to the growing base of handsets worldwide.

Our retail distribution at Radio Shack has launched, and should build through the balance of this year.

And carriers are beginning to increase their launches of high-volume, game-capable handsets in anticipation of the back to school and Christmas selling seasons.

We remain bullish on the overall market growth trends, and believe the cell phone is the best-selling gaming devise on the planet.

I want to discuss several important events that occurred in the second quarter in more detail.

These include our integration of the Blue Lava acquisition, our new international distributions strategy and our decision to file suit against Verisign and Jamstar for trade mark infringement.

Blue Lava integration.

The JAMDAT studio and deployment teams did a remarkable job integrating Tetris in the Blue Lava studio.

Immediately upon the closing of the transaction on April 20th, we began shifting development and deployment resources to the Tetris product.

We trained teams in our LA, Montréal and Hydro bud India studios on the core Tetris engine technology.

As a result of our efforts, in less than 10 weeks, we deployed over 1000 Tetris skews, representing roughly one third of the total skews JAMDAT deployed in the quarter.

Today we are continuing to deploy Tetris in Europe with the rights reverted to JAMDAT on June 8th and other markets where we currently hold rights.

On August 8th, the rights to Tetris for the Korea market reverted to JAMDAT and we are working in partnership with local publisher Comtous (ph), to publish Tetris and other JAMDAT products in the Korean market at this time.

I want to stress the importance of our success integrating Blue Lava.

Over a 3 year period, we have acquired and integrated 4 separate companies.

Demivision, Exacto, Down town and Blue Lava, all while maintaining growth and profitability.

In a market like ours where high potential for consolidation exists, we believe that JAMDAT proven ability to mobilize our studio deployment sales, human resources and finance teams for rapid acquisition integration represents a significant competitive advantage.

International distribution.

As a result to our Tetris launch our previous decision to expand our portfolio of European specific products and our increased allocation of deployment resources to Europe, our European business remains strong in Q2; our success in North America often over shadows our excellent results in the European market.

For example our football management product LMA manager 2005 was the number 1 product across all UK carriers in May.

We have a strong slated product in the pipeline for Europe including Paris Dakar Rally 2006, Club Football 2006, a new Tony Hawk's skateboard product, American Wasteland, and a new Lord of the Rings game, Legends.

We have also opened an office in Bucharest Romania in order to provide greater deployment support for our European sales teams.

In addition, we have been steadily increasing our direct distribution in Japan and now have 13 games and several other entertainment products on sale in Japan.

In Q4 2005, we will have the exclusive wireless rights to Tetris for all Asian territories.

We intend to use Tetris to generate predictable revenues while increasing distribution opportunities for our other products in the Asian markets.

Overall, our international distribution has benefited from the addition of Tetris just as we had planned when we undertook the Blue Lava acquisition, and as a result we remain optimistic about JAMDAT's opportunities for growth in international markets.

Finally in Q2, JAMDAT filed suits in federal court against Jamstar International, Yamba (ph) GMBH (ph) and VeriSign Incorporated for trade mark infringement and unfair competition related to the use of the Jamstar (ph) brand in the United States.

JAMDAT is seeking to enjoin the defendants from continuing to use the Jamstar name in the United States as well as to recover damages.

We have worked hard since our founding in March 2000 to build a world class reputation for quality, innovation and value in the JAMDAT brand.

Since the launch of Jamstar in the U.S earlier this year, we have encountered numerous instances of consumer confusion and have received numerous consumer complaints regarding Jamstar.

We believe that the use of the name Jamstar has caused and will continue to cause confusion in the market place to the detriment of JAMDAT's business.

While we abhor litigation, we find it necessary to act to protect the brand we have worked so hard to build.

The case is proceeding on an expedited basis, and the trial is currently scheduled for November of this year.

In conclusion, JAMDAT is successfully executing its core strategy and delivering its financial results.

We continue to launch great games based on world class intellectual property.

We continue to increase our capacity to deploy those games to the installed basic handsets in efficient and timely manner, and we continue to increase our distribution leverage and improve our long standing carrier relationships around the world.

We are operating in an increasingly competitive environment.

Encouraged by our success, a number of companies large and small, are now trying their hand at wireless games publishing.

We have been anticipating this competition for a long time and we believe our proven publishing strategy and disciplined execution continue to create competitive advantages for JAMDAT.

For the first half of 2005, we delivered revenues and earnings that exceeded our guidance and we enter the second half of 2005 with continued confidence in our ability to deliver strong financial results.

And now Michael Marchetti, our Chief Financial Officer, will provide some more detail on our results and our guidance.

Michael?

Thank you, Mitch and good afternoon.

I will first discuss our Q2 2005 results, including a breakdown of revenue by carrier, product and geography followed by operating expenses and income.

I will conclude with a discussion of guidance for Q3 and full year 2005.

Revenues, JAMDAT Q2 revenues of 19.3 million exceeded our forecast of 19 million.

Our forecast took into account the seasonality associated with Q2, which we indicated on our last call, as well as our internal resource allocation to the integration of Blue Lava and the wide spread deployment of Tetris.

Tetris branded products contributed 4.1 million or 21% of revenue in Q2.

Revenue by carrier, the following carriers represented greater than 10% of revenues for the reported period.

Verizon, Verizon continues to be our top carrier by revenue, accounting for 32% of Q2 revenue, up from 31% in Q1.

Revenue grew at 32% sequentially from Q1 and was up 90% over Q2 last year.

Cingular, Cingular accounted for 21% of Q2 revenue, down from 26% in Q1.

On an absolute basis of Q2, Cingular revenues were up slightly over Q1.

Coming off an extremely strong Q4 and Q1, we experienced a drop on Cingular in April and May which we attribute to increased competition and to slow new handset launches.

However, we have seen a market improvement in Q3 so far.

Sprint, Sprint accounted for 15% of Q2 revenue up from 13% of Q1 revenue.

Revenue grew 47% sequentially at Sprint and was up 92% over the last year.

We believe Sprint's focus on quality over quantity continued to benefit both Sprint and JAMDAT.

Subscription based transactions accounted for approximately 25% of Q2 revenue up slightly from 24% of Q1.

We are currently offering subscription based products on 14 carriers up from 13 in Q1.

Revenue by geography, US accounted for 84% of Q2 revenue down from 86% of revenue in Q1.

Revenue by product, we continue to diversify our revenue by product.

We had approximately 126 products-generate revenues during Q2 up from about 110 at the end of Q1.

We released 4 new products in Q2 as well as 12 products we picked up from Blue Lava.

The new releases included LMA manager 2005, Tony Hawk 3D, Fergal and JAMDAT Mini golf.

JAMDAT branded applications accounted for 34% of Q2 revenue down from 42% of revenue in Q1.

This decline is due to the addition of Tetris.

Excluding Tetris, JAMDAT branded applications were roughly flat at 42% of revenue.

Applications endorsed by major sports leagues MLB, the NBA, the NFL and the NHL accounted to 8% of Q2 revenue versus 9% in Q1.

Only two franchises accounted for 10% or more of our revenues in Q2.

Tetris at 21% and Bejeweled at 15%.

For JAMDAT bowling was 3rd at slightly under 10%.

Revenues from JAMDAT bowling 2 and bowling 3D, the versions being actively deployed now were up over 20% sequentially from Q1.

Gross margin, our gross margin was 74% for Q2 down from 77% for Q1.

The primary reason for the decline in gross margin was the increase in amortization of intangible assets as a result of the Blue Lava acquisition.

Intangible amortization increased from 290,000 or 2% of revenue to 1.7 million or 9% of revenue in Q2.

License amortization costs were 1.1 million for Q2 or 6% of revenues up slightly from 792,000 or 5% of revenues in Q1.

Operating expenses, total operating expenses for the second quarter were 13.1 million or 68% of revenue versus 9.1 million or 60% of revenue in Q1.

The reason for the increased as a percent of revenue was the $2.6 million IP R&D expense.

Excluding this charge, OpEx was 54% of revenue down from the 60% in Q1.

Operating expense were as follows, 4.8 million or 25% of revenue on research and development which is down from 28% in Q1, 2 million or 10% of revenue on sales and marketing which is down from 11% of revenue in Q1, 3.3 million or 17% of revenue on G&A which is down from 18% of revenue in Q1 and $322,000 of non-cash stock compensation expense which is down from 357,000 in Q1.

Our full time head count at the end of Q2 was approximately 248, up from 196 at the end of Q1.

This includes approximately 30 employees added as a result of the Blue Lava acquisition.

Income and earnings.

As I noted, we had a significant non-cash acquired in proceeds R&D expense.

This expense was as a result of a higher than anticipated valuation being applied to certain products, including Tetris Battle, that was still on production at the studio in Hawaii when the acquisition closed.

In addition, we had a $1.7 million income tax benefit in this quarter as a result of the release of a portion of our accumulated NOLs and other tax benefits.

We were required to take this benefit this quarter as a result of past and forecasted profitability.

We currently do not expect taxes to be material during the remainder of 2005.

I will discuss our income and earnings as reported, as well as excluding the IPR&D and in tax benefits to be consistent with our prior guidance.

Pre-taxing comes from operations with 805,000 or 4% of revenue as reported.

Excluding the IPR&D, our pre-tax income from operations was 3.4 million or 18% of revenue.

Net income with 2.6 million or $0.11 per diluted share as reported,.

Excluding the IPR&D and tax benefit, net income with 3.4 million and 18% net margin or $0.14 per diluted share compared to our guidance of $0.12 per diluted share.

Adjusted net income, which excludes amortization of stock compensation and other intangibles, was 7.2 million or $0.30 per diluted share.

Excluding the tax benefits, adjusted net income was 5.4 million, a 28% margin or $0.23 per diluted share compared to our guidance of $0.18.

At the end of Q2, we had 24.9 million weighted average fully diluted shares out outstanding.

This amount includes the impact of shares that may be issued at our option as deferred purchase price for the Blue Lava transaction.

Balance sheet.

As of June 30th we had approximately $21 million in cash and cash equivalent and $18 million in accounts receivable.

We have $15 million of outstanding bank debt, an additional borrowing capacity of approximately $6 million.

In Q2, we generated $8 million in cash from operations.

We believe our current balance sheet, available borrowings, and ability to generate cash from operations, is sufficient to meet our current operational needs.

And now turning to guidance.

The wireless entertainment market is dynamic and highly competitive.

We believe our ability to manage and accurately forecast our business in its environment is a testament to the unique competitive position we have built up over the past 5 years.

We remain committed to our core strategy and intend to continue to invest in products, technology and distribution capability that create long term value for JAMDAT and our shareholders.

Full year 2005.

We are reaffirming our prior full year guidance of approximately $80 million in revenue.

We expect adjusted earnings per diluted share of approximately $0.83 and GAAP earnings per share of approximately $0.42.

The full year earnings per share include the $0.07 tax benefit realized this quarter.

We do not expect taxes to have a material impact on our earnings in the second half of '05.

GAAP earnings include approximately 10.2 million of non-cash intangible asset amortization, IPR&D and stock compensation for the year.

We estimate 24.6 million weighted average fully diluted shares at the end of 2005.

Q3.

The wireless game business is consumer driven business and as such we continue to experience a pattern of strength in Q4 and Q1 with softness in Q2 and Q3.

We expect this pattern to continue, with Q3 historically our slowest quarter.

As such we are forecasting only a modest increase in revenue in Q3 to between 20 and $21 million.

Also as we have done in the past, we expect to wrap R&D across our organization in Q3, to deploy products around the world for the seasonally strong Q4 and Q1 period.

Finally we expect to incur a significant legal expenses in Q3 and Q4, related to the Jamstar litigations that Mitch mentioned earlier.

For Q3 we expect adjusted earnings per share of approximately $0.13 to $0.15 and Gap earnings per share of $0.04 to $0.06.

Gap earnings include approximately 2.4 million of non-cash and tangible assets amortization and stock compensation.

We estimate approximately 26.1 million weighted average fully diluted shares at the end of Q3.

I will now turn the call back over to the operator for questions.

Thank you.

(Operator instructions)

Our first question today will be from Jeff Kvaal from Lehman Brothers.

Thanks very much.

My first question is around the legal expenses and its impact on your guidance.

It sounds as though that will be taking a pretty big chunk out of the EPS outlook for both the 3rd and the 4th quarter.

Is it possible for you to quantify how big of an expense the legal charges may be?

We don't want to quantify at this point because, with the trial is set for November.

But in the sort of million dollar magnitude, but it could be slightly higher, slightly lower.

Okay.

Is that per quarter, Michael?

No, just for the back half.

Okay.

And my second question is, you had previously given us guidance for 2006. do you have comments on the outlook for '06?

Nothing at this point would change our outlook for 2006.

We just don't want to provide additional -- we don't have additional details to provide on those numbers at this point.

So we're just as soon wait till we have more details for the 2006 guidance.

So should we consider the '06 guidance rescinded until further details available?

Or should we consider that in play?

No, as I said no change.

Okay, great.

Thanks very much.

And our next question is from Mike Wallace from UBS

Hi, a couple of questions.

After the last call you had given guidance, there was a little bit of a lower share count.

And I think then you had assumed that there would be taxes paid.

And now the guidance is the same and you're assuming no taxes on the back half, could you talk about that Mike?

Yes.

On the taxes we found that we have more tax credits from a research and development stand point than we had initially anticipated, that's on the tax side.

What was the other question?

The share count

One thing we hadn't factored into the share count was that we would need to include the portion for the note that's due next year, into the share count this year regardless of whether or not we ultimately pay that in cash or stock.

Okay.

Thanks

And we will take a question from Kevin Dede from Merriman.

Hi guys, nice job on the quarter.

Thanks Kevin.

Can you give a feeling for your strategy with regard to going off portal?

Where do you stand on that now Mitch?

I think we're currently actively investigating all of our distribution options at this time.

I think we remain committed to the carrier channel as the primary channel for the distribution of our software for the foreseeable future.

That said, we are certainly aware of what's going on, particularly in Europe but to a lesser extent here in the United States regarding off deck distribution.

And one of the thing that's attractive about it is that it gives us the ability to get a marketing message directly to the consumer with a call to action that's consistent across carrier, which is currently one of the challenges in our business and that is communicating the marketing message to an end user that will allow them to find our software regardless of what carrier they may have.

In addition, one of our sort of off-deck strategies is to be found in our partnership with Radio Shack.

Radio Shack really is a component of our off-deck strategy.

We're very excited about the launch of that and again it gives us the ability to market directly to consumers at a point where they are highly motivated and likely to buy our software.

How many stores do you think you are in Radio Shack at this point?

That's a number I don't presently have but we expect to be fully deployed throughout the 5000 stores in the North American system by the end of this year.

Okay.

So, Michael, you said that you think Cingular is bouncing back in September but your guidance is more on the modest side.

Does that mean you might be losing share or what do you think is going on?

Well, we certainly think, coming off of Q1 where we had just ridiculous market share, we were one of only 3 or 4 launch partners with Cingular when they launched their new services back in Q4 and into Q1.

So certainly think we see a little bit of share loss as they just put more applications up on the deck.

We still have number one market share by a pretty long margin.

So we do see that coming back now and we see them launching more handsets, as Mitch said, the black razor and some newer handsets coming online in the back half of the year.

Well, you know I can't go without asking my favorite question.

We were expecting it.

You mentioned the last Asia license coming up for Tetris.

What's the plan to go beyond Korea?

We have a number of discussions with potential partners in the Japanese market, and with carriers in the Japanese market.

Michael and I were just in Japan two weeks ago to solidify some of those relationships and discussions.

With regard to China again, we believe that China is a market in which we would benefit greatly from partnership, and again, Michael and I have had several discussions with potential partners in the Chinese market who could help us launch Tetris in the manner that we believe it deserves in that market.

As I'm sure you are aware, the market for downloadable software in China has really not developed to the same extent that the WAP and SMS market has developed, but we see that turning around somewhat and we are encouraged by what we see there.

Again, we do believe that we would benefit greatly from partnership from someone who knows the local territory somewhat better than we do at the moment.

And we will go next to Evan Wilson from Pacific Crest.

Hi guys.

Thanks for taking the question.

First, as it relates to the acquiring of licenses for Tetris internationally, do you expect any impact on gross margin from that?

I think we all know that carriers take out little chunks more internationally than they do in the states.

I'm sorry, and what of the untapped gross margin?

The carrier cut comes out of net revenue, so we don't book the carrier cut in our gross margin.

And as I take a look at -- you said 4.1 million of the revenue was from Tetris.

That means that the organic business was relatively flat in the quarter.

Was that -- could you talk through again, what you think these specific drivers of that was, and if you saw increased seasonality in Q2 than you saw last year?

Yes, I think with regard to that, I think you have to be a little bit careful about the way you look at our core business in light of the integration of Tetris.

Remember that we devoted over a third of our development resources, in the quarter, to deploying Tetris which resulted in, as I said, the creation over a thousand skews.

And, I think that means you have to understand that this not a zero sum game to the extent that we deployed a thousand skews of Tetris, that meant that there was skews of other JAMDAT products which we didn't deploy in the quarter.

So, again, it wasn't a situation where Tetris was 100% additive to our core business.

Nevertheless, we consider that an essential trade for setting ourselves up for a great Q4 and Q1, because having Tetris fully deployed in Europe, in Asia on the North American carriers like Cingular where it had yet to be deployed, we considered a very important strategic need for the company going forward.

So, I think with that, yes we did make the decision to favor Tetris in the quarter over some of our poor skews, but I think now that we've gotten those Tetris products out there, we're starting to refocus our deployment energies on our core business, and we expect core business to be back on a growth trajectory in Q3 and particularly in Q4 and Q1.

Had you expected it when you initially gave guidance for Q2 to get the European license for Tetris?

Yes, we didn't expect a lot of revenue because we weren't getting the right back until quit late in the quarter.

We really only had about two weeks of Tetris rights in Q2.

So, yes, it's still getting deployed, we only started actively deploying that product in July, at the end of July.

So--?

Outside the end of June.

End of June, so, and its still ongoing being deployed throughout Europe.

So, it's safe to assume that European Tetris's are very small piece of the 4.1million.

It was -- I don't think it was almost --it was probably no European Tetris in the 4.1million.

Thanks

And we have a question from Sunny Sunup (ph) from Kaufman Brothers Brothers.

Actually my question has being answered, thank you very much.

Thanks Sunny.

We will go next to Mark May from Needham & Company.

Hi, thanks for taking my call.

My first question is related to the last question.

Just trying to get a better sense of the organic growth in the quarter, which might also help in thinking about the growth in the third quarter, you had the contribution of Europe, I think you had that in since June 8th, and wondering what the total contribution of Blue Lava would have been had it being included in the full quarter.

And maybe if you could talk about the contribution of adding Cingular during the quarter and then I had a follow up--?

Sure, let me try and take some of (inaudible), Cingular was actually being distributed by Bandai (ph).

Caches is being distributed by Bandai from Q2, from the part of Q2 that they had actually gotten the product out, it wasn't fully deployed, but prior to the Blue Lava acquisition, Blue Lava had entered into a distribution partnership with Bandai, and Bandai was distributing that product on Cingular, so we would had to wait for that distribution relationship to expire which really expired on July 1st .

As to the second question, was about--?

Well, I'm just trying to figure out -- I think you had Europe and since June 8th so, three and a half or three weeks.

Europe,--?

What's the contribution from Europe?

On a monthly or a quarterly basis?

We've not seen that yet.

Europe we took over, we started deployment process in June 8th, so we haven't really seen a full month of fully deployed Tetris.

We won't see that until, in Q3.

Is there some other European related Tetris license that you're acquiring that kicks in, in January 1st?

I thought the title was already launched on some carriers.

The title had --there was a previous licensee.

That licensee was a company called I-phone (ph).

All of their rights reverted to JAMDAT on that June date.

And they were already generating revenue?

Yes but those revenues were not -- we didn't get those revenues.

Until June 8th?

Yes until -- No actually, we didn't even get them on June 8th.

We got them as soon as our product started to generate revenue.

That's why it started to come down on June 8th and we had to relaunch new product on June 8 starting on June 8. (inaudible)

Understood, based on I-phone's track record or the license before, what's your expectation for the contribution of that say in Q3?

We don't provide certain specific product level forecast.

It's taken to our Q3 projections.

Okay thanks.

And Blue Lava as it was in Q1, would the contribution have been if it were included for the full quarter in Q2?

Q1 -- if we went back and included all of April, I would have to look what from the day we picked up, it would probably be a couple of hundred thousand dollars I believe.

But I don't have that number handy.

Okay thanks.

And my second question had to do with market share.

You addressed this a little bit.

But at least from the carriers that reported their volumes, it seems like their revenue generating downloads were up 5%, 10% sequentially.

If the difference between that macro number and your numbers is some market share lost, maybe you could talk a little bit about who you are seeing as the biggest competitive threat, who do you think is gaining the most share, which titles or which publishers?

I think on Cingular, again as Michael pointed out , we were one of a very few publishers who were active in Q4 of last year and Q1 of this year.

And starting in March, April this year, Cingular launched products from about 10 new publishers.

I think the most significant among those was likely to be THQ, since they had an exclusive partnership with Cingular for the Star Wars property, and as THQ indicated in their calls, the Stars Wars property performed quite well on Cingular.

So I would assume that, that was one of the companies, probably the most important company who built share on Cingular during the period.

Beyond that I really don't have any more specific information about the performance of a company.

I know my own numbers but I don't know everybody else's.

And we will go net to Stephanie Wissink from Piper Jaffrey.

Hi, good afternoon guys.

This is Tony Gikas from Piper.

Couple of questions.

Do you have any sense for the dollar spend per user in the quarter and how did that change from the prior quarter, prior year?

Trying to figure out how sticky the applications are.

Second question, how big is the Jamstar offering and how much in dollars do you think that impacted business?

On the first question, we don't have any reliable data other than what we internally generate on a carrier by carrier basis.

I mean, each carrier is different in terms of how much revenue obviously they generate per user in data revenue.

So there is no sort of single answer to that question.

I don't know - -

No sir, did they - -

- - up or down and we look at each carrier separately.

With regards to you second question, can you clarify what you are asking in view - -

How many products, how big is the product offering from Jamstar and how much do you believe that impacted the business during the quarter?

Yes, the Jam Star product offering is primarily ring tone and image offering and not a games offering.

So I don't think it had a direct impact in the manner that I think you are suggesting.

What was more important was the port calls and evidence of consumer confusion that we faced in the quarter.

Literally, consumers who called us up assuming that we were Jamstar to complain about things that happened during the quarter, that really more what we are talking about.

Okay and then the number of games and development, and have there been any changes in the R&D spend on a per application basis?

And last question, maybe just any update on the competitive landscape?

As you indicated earlier a number of new publishers are getting into the category but anything specifically from the carriers or software publishers that we should be aware of?

Do you believe they are coming fast or is it something you are more concerned about perhaps next year?

So taking the first question with regard to changes in R&D and the product slate.

We are current -- we are continuing to execute the plan that we put in place at the beginning of the year.

That slate is always some what back loaded given the consumer nature of the business toward the 4th calendar quarter and 1st calendar quarter of 2006.

So we are -- we typically have a lighter release slate in Q2 and Q3 and a heavier release slate in Q4 and Q1 and I think you will see no difference this year.

We've really teed up a great slate for the back half of this year.

With regard to the R&D spending and investment, yes the spending per product particularly with regard to the 3D products for the advanced devices that we see coming into the market at the very high end of the market.

Production cost on those products are ratcheting up as we expected.

And I think the demands of quality, the size of the applications that we are able to publish and that some of our competitors are publishing with regard to the 3D applications have a lot more assets, a lot more sound, a lot more graphics a lot more programming involved and a commensurate increase in production costs.

Because those platforms are as yet fairly small as a percentage of the overall handset installed base, we are investing a bit ahead of the market, with regard to 3D.

But we think it's very important because we expect 3D to be a material part of the business in the future, primarily in 2006.

On the last question which was on competition, I don't think again anything specific.

I think it's as we expected.

One thing that I think is happening in the market place, which I think is actually a positive, is that we see the quality of publishers increasing somewhat.

We really now see competition from companies like THQ and Electronic Arts.

Frankly I don't think there could be a better validation of the wireless games business than the fact that EA and THQ are competitors and that we are seeing EA bringing their crown jewels like John Mad football through the mobile phones.

I don't think -- we are not surprised by anything we are seeing competitively in the market place and I think its overall good for the business.

Okay.

Thanks guys.

And we'll take a question from Jason Willey from Moors and Cabot Investments.

Yes, good afternoon guys.

First just wanted to clarify on the guidance for the taxes, does the - - are you assuming in your adjusted number that, they are now under taxes for the full year 2005?

No additional taxes.

Okay, no additional taxes.

And then also just wondering what you are looking for in terms of amortization of intangibles that would flow into the gross margins?

For 2005, for the full year, 10.2 million in total and then accrued stock costs that's about 8.9 of intangibles.

How much of that will actually flow in to the cost of revenue?

All of it.

On a GAAP basis, all of it.

Okay, and then a question just on comart (ph) and I am wondering if you are seeing any changes, are you doing more with the carriers on a marketing basis, do you expect to in the coming quarters?

Yes we're constantly doing stuff with the carriers and now with the Radio Shack in the stores and that you had expected.

Thank you.

We will go next to James Lee from Decisions Economics.

Good afternoon guys.

Can you just talk about the porting costs a little bit, obviously as you guys introduced more complex games, bring them to the market, one has to assume the porting process of that is -- has become more complicated as a result.

Can you talk about what you are doing so that to make the process more efficient, are you finding new software solution to decrease the cost or are you thinking about outsourcing the process to somebody else and I also have a follow up question as well?

Sure, we believe that we have one of the most refined and efficient processes for porting and deployment of any company in this space, if not the most, and so we are not really looking for a 3rd party solution, we have looked at a number of little ware (ph) products that purport to improve the porting experience or make it into some kind of a universal content creation machine.

Nothing that we have looked at we consider to be a major benefit or improvement to our own existing processes, so we are quite comfortable with the way we do it right now, we devote a lot of resources to it, we devote a lot of internal energy to refining and managing that.

We have created a lot of platform technology ourselves, which makes that process quite smooth and allows us to integrate porting and deployment across studios all over the world, for example when we were deploying and porting Tetris in Romania in India, in Montreal and in Los Angeles, and we were coordinating all those efforts simultaneously from a central location here in Los Angeles.

So, I don't know a whole lot of other companies that are operating at that level of efficiency.

Mitch, can you just talk about maybe just contour (ph) cost per game on the porting side and maybe compare 12 months ago, even 6 months ago to now, and so we can get a sense how much improvement you actually made on the porting side.

I mean -- I think we've historically given out the number that it's been approximately, $1,000 to $1,500 per handset in aggregate, obviously that masks a lot of complexities since frequently we may have multiple teams making reference builds and importing those reference builds, so it's sort of difficult to get at that number but I think we are still comfortable that approximately $1000 a handset is a rough estimate of how much it's costing us to port on worldwide basis.

Okay, that makes sense.

Can you also talk about your Radio Shack arrangement in terms of how much of that is taken into your 2005 guidance and maybe give some color on that, that'll be very helpful.

Yes, we are not assuming a lot of the Radio Shack revenue in our 2005 guidance we're really anticipating that it's going to kick in materially in 2006 so hopefully that answers your question.

Is that a revenue sharing arrangement of Radio shack or how is it sort of the financial arrangement sort of work out between you and Radio Shack.

Sure, Yes it is infact a revenue sharing relationship between us and Radio Shack.

Okay and lastly Mitch.

Can you just provide more color on the Chinese market a little bit.

Can you talk about your deployment and offload the rain game in China?

How is that doing on the China Unicom platform?

Any additional color on that will be helpful and when do you think the Chinese mobile gaming market will start taking off.

It seems like the carriers over there, they're not pushing that application right now.

People looking for sort of inflexion point some where in 2006.

Yes, I would agree with that assessment actually, we've launched the Lord of the rings theme, Lord of the Rings it's actually quite a big movie brand in the Chinese market.

I think its one of the most successful movies in the history -- certainly Western movies in the history of China.

That product is out, I think it's a little too early to tell how successful it's ultimately going to be but I think your overall assessment that the download market is getting relatively slow in China is an assessment we share.

So, should we expect you to introduce Tetris into the Chinese market sometime in 1st quarter of 2006.

Sometime in 2006.

Yes, that's the plan.

Okay thanks.

And well take our final question today from Sameet Sinha from Kaufman Brothers.

Yes.

Hi thank you.

Specifically on the bowling game, can you remind me what percentage of these revenues did it contribute to last quarter?

You said it was below 10% this quarter.

Correct.

Yes, hold on we are going to look up that numbers for you.

It should be about 11% of revenue last quarter.

And it was just slightly under 10% as a franchise this quarter.

So, do you think --, I know this is bowling including bowling, 2 and 3D and everything included.

Everything included.

We talk about bowling or bejeweled attaches (ph) with them, all the products under those three brand franchises.

But do you see that I mean--.

We see bowling 2 and 3D bowling ramping and the older bowling ski (ph), which is not really getting ported any more.

Flat to declining in sales.

Okay and can to speak to media fragmentation i.e. using your cell phone.

Consumers have options they can play games, to a small extent they watch video clips and other things.

Do you see that affecting your business any time soon or not?

Yes, I think our assessment is that --, and again its somewhat blue sky would be at the moment the downloadable or streaming video.

We don't believe it's having a material impact on the gaming business.

We think that the greatest impact on our ability and the carriers ability to grow gaming as a category is really just consumer awareness and its one of the reasons we're investing so aggressively in our relationship with Radio Shack and other means of educating the consumer about the availability of games on their handsets.

But I would not say that right now our expectation is that streaming or downloadable video is stealing eye balls if you will from gaming as an activity.

That said, in markets where broadcast television is available on the handsets, I think that maybe something of the different story since I think that's quite a different consumer value proposition and so --, I think the jury is still out on that.

As I said the bowling was 14% in Q1 was 11% for the 6 months.

Okay 11% for the 6 months.

So, okay I think that's it.

Thank you very much.

Great.

Thank you.

That concludes our question and answer session today and also our conference call.

We do appreciate your participation, you may now disconnect.