美商藝電 (EA) 2005 Q3 法說會逐字稿

Good afternoon and welcome to the JAMDAT Mobile third quarter fiscal 2005 earnings conference call. [OPERATOR INSTRUCTIONS]

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

Please go ahead.

Thank you.

Good afternoon, ladies and gentlemen, and thank you for joining us today to discuss JAMDAT Mobile's third 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 1:00 Pacific Time, 4:00 Eastern Time.

If you have not received a 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 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 annual report filed on form 10-K, quarterly report filed on form 10-Q, as well as current reports filed on form 8-K.

Now I would like to turn the call over to Mitch.

Thank you Allyson, and welcome to JAMDAT's Q3 conference call.

JAMDAT delivered another record quarter, a testament to the value of our scale and competitive positioning.

Revenues were $20.2 million, up 113% from Q3 2004.

For the 9-months ending September 30th, 2005, revenues were $54.6 million, up 119% over the first 9-months of 2004.

GAAP net income for Q3 was $1.4 million, or $0.06 per share, versus an $8,000 profit in Q3 2004.

Adjusted net income, which excludes stock compensation and the amortization of acquired intangibles, was $3.7 million, or $0.15 per share, up 251% from Q3 2004.

For the first 9-months of 2005, our adjusted net income is up 278% from the same period a year ago.

We accomplished this is the context of a very challenging quarter for the mobile games industry.

In addition to the seasonality the industry has experienced in the past during the third quarter, this year the major US carriers made significant changes and upgrades for their commercial platform technologies and methodologies, which often led to service interruption and caused our sales to be lower than expected.

JAMDAT is entering the seasonally strong fourth quarter and Q1 2006, positioned as never before.

I'm going to discuss four reasons why we are confident in our ability to grow our business in Q4 and in the years to come.

First, we are hopeful the US carriers have largely completed their much-needed platform transition and our preliminary Q4 results suggest that the mobile games market is back on the upswing.

Second, we believe our US market share has reached unprecedented levels, validating our competitive positioning and the strength and breadth of our product portfolio.

Our European market share is also increasing and we are making meaningful inroads in Korea and Japan, particularly with the launch of Tetris and the upcoming launch of Doom RPG.

Third, we continue to create hits.

For example, the two major titles we launched in October, Doom RPG and SOCOM, have initially sold through at rates which make them two of the most successful launches in our history.

Fourth, we continue to create significant leverage from our R&D spending, not just on new games, but also on multiplayer platforms and distribution technology.

Our focus on R&D has resulted in increased efficiency and reach that will allow us to scale throughout 2006 and 2007.

I want to provide a bit more color on each of these key aspects of our current positioning and explain why they give us confidence in our ability to grow our revenues and earnings at market-leading levels.

US carrier performance - as I mentioned, Q3 was a particularly challenging quarter in the US, as many of the major US carriers undertook platform upgrades, service relaunches or modifications in the quarter.

While this led to service outages, which resulted in lower sequential growth for the mobile games industry in the US, we are hopeful that the worst of these issues are now behind us.

The result is stronger, more robust distribution platforms for our content, as evidenced by the results we've witnessed thus far in Q4.

For example, T-Mobile relaunched their games deck in early September.

For July and August, the two months prior to the relaunch, JAMDAT's T-Mobile revenue was down significantly from previous highs.

However, in September, our revenue jumped 200% over August and was up almost 40% over our previous monthly high-water mark for that carrier.

We saw good sequential growth in October on other US carriers as well.

So having weathered significant outages and carrier platform issues in Q3, we believe that with new platforms in place, Q4 and Q1 can return to their historically strong growth rates.

JAMDAT market share - It seems as if every time a new company with no prior history in the mobile games business announces their intent to enter the space or makes an acquisition, someone invariably asks what affect this will have on JAMDAT's market share.

Well, quarter after quarter we've watched the entry of new companies and quarter after quarter we've delivered market share well above levels of the industry leaders in any entertainment category, including packaged goods video games, film or music publishing.

In Q3, the independent market analysis team at Telephia published Q2 2005 market share data for our space.

It showed that JAMDAT commands 31% of the US market, over four times the market share of or nearest competitor.

This means that nearly one out of three mobile games sold in the US in Q2 was a JAMDAT product.

Over 80 companies competed for the remaining share of the US market.

In the US mobile game market, our brand reach and positioning is truly unprecedented.

We also continue to gain share in Europe, where our Q3 revenues were up 41% sequentially, as we deployed Tetris and other key titles throughout the European market.

The launch of Tetris in Korea and Japan and the upcoming launch of Doom RPG in Japan, will enable us to increase market share to these key Asian territories as well.

Our business has proved highly resilient to the entry of new competitors in the domestic market and our publishing strategy has proved capable of growing share in foreign territories.

This gives us a lot of confidence in our business for the coming year and beyond.

JAMDAT's ability to create and publish hits - JAMDAT has consistently published hit products.

Creating one hit is, for many companies, a happy accident.

But for great companies like Pixar or Disney, Activision or Electronic Arts, companies that deliver hits consistently, year after year, making hits is not an accident, but rather the result of a deep understanding of talent and the creative process, as well as the ability to create, license or acquire properties that connect with consumers.

At JAMDAT we believe our consistent success comes from our proven creative management skills and processes, as well as our ability to deploy and distribute our products broadly and efficiently.

As a result of our success in selecting, managing and distributing our products, during the last several months we have simultaneously had as many as 7 of the top 20 bestsellers on major US carriers.

In Q3 and thus far in Q4, we've continued to improve our track record.

For example, in Q3, our Montreal Studio launched JAMDAT Mahjong for both BREW and J2ME, to strong reviews.

The title has already reached top-seller status on both Sprint and Cingular.

In October, we launched Doom RPG through our partnership with id Software.

Again, simultaneously on both BREW and J2ME in the US and in Europe.

This revolutionary title, which has received some of the best reviews ever for a mobile game, has been to date one of our strongest launches.

Also in October we launched SOCOM;

US Navy Seals, in partnership with Sony Computer Entertainment.

IGN called it a superb mobile game and rated it 9 out of 10.

Like Doom RPG, the SOCOM launch has been extremely strong.

These new titles added to our list of proven franchises, like Tetris, Bejeweled, JAMDAT Bowling, MLB, Tony Hawk, Downtown Texas Hold'em, Scrabble, Yahtzee and others.

With our strong catalogue and our ability to launch new franchise properties into the top sellers, we believe we are well positioned to lead this market in 2006 and beyond.

JAMDAT's R&D capability - One aspect of our strategy that is now bearing fruit is our investment in cutting edge distribution technologies and wireless multiplayer platforms.

This investment has resulted in the set of platforms, technologies and processes that allow us to manage, deploy and monetize our products better than any of our competitors.

In Q3 we complete work on the latest version of our Flight platform.

Flight is a sophisticated content management importing tool that allows us to target all mobile platforms as well as desktop PCs with a common code base.

By using Flight we can cut up to 12 weeks out of the deployment process and deliver more SKUs to market.

The success of JAMDAT Mahjong is an example of the benefits of the Flight system.

Flight will help us continue to scale efficiently in the increasingly complex handset environment in which we operate.

But Flight is just one of the many proprietary technologies we've developed to increase our ability to distribution our titles and scale our business.

Others include our production management platform that allows us to track the development status of product in real time, in our studios around the world.

Our hardware management platform that maintains profiles and a knowledge base on over 3,500 handsets worldwide.

Our submission tracking platform, which helps us manage the carrier certification and pricing of these thousands of SKUs we publish every quarter.

And our SKU management platform, which allows us to merchandise our self-managed decks and our off-deck sales, supporting both carrier billing platforms and premium SMS billing.

We have used SKU manager to deploy direct to consumer interfaces on 12 JAMDAT-managed distribution channels around the world, including our own decks on Cingular and Rogers, our web channels on Yahoo, Radio Shack, JAMDAT.com and the McDonald's Monopoly promotion, as well as JAMDAT channels on carriers such as Telefonica in Spain, League in France and 02 in the UK.

We continue to add new distribution channels, both carrier and off-deck to this [unintelligible].

Finally, we have continued to push the envelope in multiplayer technology.

We have created our third generation multiplayer engine to enable our new multiplayer titles for 2006, such as JAMDAT Pool and Tetris Vowel.

This new engine enables sophisticated social networking and community features such as buddy lists, messaging, player rankings and prizing.

Over the last two years, we have invested almost $30 million in research and development of products, technologies and processes.

We believe this is a significant competitive advantage.

We expect our R&D investments to continue to pay dividends in 2006 and in subsequent years, in the form of better games, more broadly deployed and at a reduced per SKU count.

Finally, it is important to state that the underlying growth drivers for the mobile games business, the proliferation of next generation handsets, continues to pace.

Worldwide, Lehman Brothers estimates that close to 800 million handsets will be sold in 2005 and close to 850 million in 2006; 225 million units will be sold in Q4 2005 alone.

According to estimates North American carriers will add 20 million new subscribers in 2006;

European carriers will add almost 50 million new subscribers.

At the same time, existing customers continue to replace old, lost or damaged handsets with new game capable devices.

JAMDAT has emerged from a challenging period even stronger than before.

We faced competition from private companies and media incumbents and grew our market share where others faltered.

Our Studio has given us our strongest Q4 slate ever, with titles like Doom RPG, SOCOM, NFL, NBA and Tony Hawk's American Wasteland.

Our investment in research and development of platform technologies has increased our publishing efficiency and allowed us to take advantage of new distribution opportunities both on and off-deck, around the world.

Successful, profitable, mobile game publishing is an extremely difficult and complex business, as many new entrants are now discovering.

JAMDAT has just delivered its 6th consecutive quarter of revenue growth and profitability.

We've demonstrated the value of our model and the skill of our team, quarter after quarter.

We have also successfully navigated several key industry transitions.

As the mobile entertainment business continues to evolve in the coming years, we believe JAMDAT is the company best positioned to take advantage of what we expect to be large and exciting opportunities for growth.

And with that, I will turn it over to Michael Marchetti to talk about the numbers.

Thank you, Mitch, and good afternoon.

I will first discuss our Q3 2005 results, including a breakdown of revenue, expenses, income and cash flow.

I will conclude with our Q4 guidance and thoughts on 2006.

Q3 revenues of 20.2 million were up 113% year-over-year and 5% sequentially.

This is at the low end of our forecast of 20 to 21 million.

While our forecast took into account the seasonality typically associated with Q3, our sales were adversely impacted by carrier upgrades, which caused greater than anticipated platform [unintelligible].

In addition, we experienced unusual drop in sales on US carriers during late August and early September, possibly as a result of the hurricanes and a dip in consumer spending.

We have since seen our sales rebound nicely in Q4.

International sales were 16% of revenue in Q3.

International revenues were up 81% year-over-year and 4% sequentially.

European revenues were up 41% sequentially, as a result of the launch of Tetris.

Revenue from subscription-based transactions accounted for 25% of Q3 revenues.

We are currently offering subscription-based products on 15 carriers, up from 14 carriers at the end of Q2.

We expect to add additional subscription-based channels in the coming months.

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

Verizon;

Verizon continues to be our largest carrier, accounting for 30% of Q3 revenues, down from 38% of Q3 revenues last year.

Verizon revenues were up 67% year-over-year, but down 2% sequentially, despite a whole quarter of Tetris.

The decline in revenues at Verizon, which has resulted in a perceived decline in our organic growth, is a direct result of the modifications in their billing platform and the cancellation of inactive subscriptions that Verizon completed on July 31st, 2005.

It has taken a few months for us to replace the lost monthly subscription revenue as a result of these changes.

In October, we have seen our subscription revenue begin to grow sequentially again and we expect to experience sequential growth on Verizon in Q4 and again in 2006, driven by new handset sales and product launches, as well as marketing initiatives by JAMDAT and Verizon.

Cingular - Cingular accounted for 22% of Q3 revenues, up from 13% of Q3 revenue last year.

Cingular revenues were up 268% year-over-year and 12% sequentially, as expected, after being down sequentially in Q2.

Cingular is up sequentially in October and we expect a strong Q4 on Cingular.

Sprint - the merger of Sprint and Nextel was completed in Q3 and we'll therefore present combined results of all periods when discussing Sprint.

Sprint-Nextel accounted for 20% of Q3 revenues, up from 17% last year.

Sprint-Nextel revenues were up 143% year-over-year and 9% sequentially.

Revenue by product - we continue to expand our industry-leading portfolio of products.

We had approximately 130 products generate revenue during the third quarter of this year, up from approximately 92 for the third quarter last year, a year-over-year increase of 41%, versus a year-over-year increase of 113% in revenue.

JAMDAT branded applications accounted for 28% of Q3 revenues, down from 33% last quarter.

This drop is the result of having a full quarter of Tetris revenues, which were $6.7 million in the quarter, accounting for 33% of Q3 revenues.

Other branded applications accounted for 39% of Q3 revenues, which is down from 46% of revenues in Q2.

Two franchises accounted for 10% or more of our Q3 revenues;

Tetris at 33% and Bejeweled at 14%.

Gross margin - our gross margin was 68% for Q3, down from 74% in Q2.

This decline was primarily the result of [inaudible] royalty structure associated with Tetris that resulted in a lower effective royalty in Q2.

Its [unintelligible] gross margin in Q3 were as follows; acquisition-related intangible amortization of $2 million or 10% of revenue; amortization of advanced license and royalties of $1 million or 5% of revenues; and royalties in excess of advances of $3.3 million or 16% of revenues.

We expect our gross margin to stabilize around 16%, with excess royalties fluctuating based on product mix in a given quarter and acquisition-related amortization declining at the percentage of revenues.

Operating expenses - before getting into the detail of our operating expenses, I want to point out that while we recognize that many investors are focused on our sequential increases in revenue and expenses, we manage our business to achieve sustainable growth and profitability year-over-year.

For the third quarter, our total operating expenses increased 58% year-over-year, while our gross profit was up 82%, our revenue was up 113% and our adjusted earnings grew 251% over that same period.

While these results show solid growth and scale, they were impacted by certain non-recurring items and could have been even better this quarter.

Specifically, litigation costs and Sarbanes-Oxley implementation costs are the significant impact on our operating [expenses].

Jamster-related litigation costs and professional fees related to Sarbanes-Oxley implementation were approximately $1.1 million in Q3.

Together these costs represented over 9% of total operating expenses, or $0.04 per share.

Total operating expenses for the third quarter were 12.1 million, or 60% of revenues, versus 7.7 million or 81% of revenue last year.

Operating expenses were as follows; 5.7 million or 28% of revenue on research and development, which is down from 37% of revenue last year; 1.8 million or 9% of revenue on sales and marketing, which is down from 14% of revenue last year; and 4.3 million or 21% of revenue on G&A, which is up 20% last year.

Our full time headcount at the end of Q3 was approximately 320, up from 248 at the end of Q2.

Income and earnings - income from operations for Q3 was 1.7 million, an 8% margin, up from a loss of 77,000 last year.

Net income was 1.4 million, a 7% margin, or $0.06 per diluted share, compared to our guidance of $0.04 to $0.06 per diluted share.

Net income is up [some] [$8,000] last year.

Adjusted net income, which excludes amortization of stock compensation and other intangibles, was 3.7 million, an 18% margin, or $0.15 per diluted share, compared to our guidance of $0.13 to $0.15.

Adjusted net income was up 251% from last year.

Our weighted average fully diluted share count at the end of Q3 was 26.1 million.

This includes approximately 653,000 shares that may be issued at our option at [deferred] purchase for Blue Lava.

In addition, these shares are excluded in our weighted average share count, as well as carrying the full obligation on our balance sheet as a current liability.

Balance sheet and cash flow - as of September 30th, we had approximately 25 million in cash and equivalents and 21 million of Receivables.

This is up from 21 million of cash and 18 million in Receivables at the end of June.

Our outstanding bank debt at September 30th was 14.5 million, down from 15 million at the end of June.

During Q3 we generated approximately 4.7 million in cash from operations and have generated over $15 million year-to-date, a 28% margin.

Our year-to-date EBITDA margin is 32%.

We continue to believe our current balance sheet and ability to generate cash from operations is sufficient to fund our operational needs and we do not anticipate raising additional capital at this time.

Guidance - despite the challenges in Q3, we continue to accurately forecast our business and managed to deliver earnings at the top of our guided range.

For Q4 we expect revenues of 23.5 to 25 million; adjusted earnings per share of $0.18 to $0.22 and GAAP earnings per share of $0.09 to $0.13.

We base this forecast on our Q3 run rate and the growth we have seen so far in Q4, new product and handset launches we anticipate over the coming weeks and historical growth rates we have witnessed during the holiday season in the past, offset slightly by uncertainty surround carrier commerce platforms, based on our Q3 experience.

We do not expect any material taxes in Q4 and have included expected litigation and Sarbanes costs.

For the full-year 2005, we expect revenue of 78 to 80 million, adjusted earnings of $0.80 to $0.84 per share and GAAP earnings of $0.38 to $0.42.

The full-year earnings per share amounts include $0.07 tax benefit received in Q2.

2006 - our thoughts on 2006 have not changed.

The underlying growth drivers of our business remain in tact.

We expect top line revenue of approximately 120 million, driven primarily by a 50%-plus increase in the number of game capable handsets sold in the US next year.

We also expect to increase our market share in Europe and other emerging markets.

We expect to drive consistent and predictable growth for the implementation of additional subscription and channel offerings at carriers in the US and international markets, and we expect to continue to launch new and innovative products.

We are finalizing our 2006 operating plan now and will provide more detailed EPS guidance on our next earnings call.

However, we do not expect a significant change in our target operating model, other than as anticipated, being a full-year tax pay.

We expect to grow operating income significantly faster than our expected 50% revenue growth.

We expect our full-year EBITDA margin will expand next year and we expect to achieve 20% or greater adjusted net income margins after taxes.

This margin expansion flows from increased scale in R&D and G&A, with those expenses declining significantly from their current, combined 46% of revenues.

Finally, we hear a great deal of concern regarding expected increases in marketing expenses in 2006.

Customer acquisition costs and marketing efficiency is obviously as important to us as it access to premium content in distribution.

We have been comarketing with carriers for years and have extensive comarketing arrangements with all our major carrier partners.

These arrangements extend into 2006 and beyond in many cases, and generally cover far more than simply spending marketing dollars.

The contractual marketing costs associated with such an arrangement have been incorporated in our sales and marketing expense to date, or have been accounted for as contra-revenue, reducing revenue in certain instances.

While the absolute contractual dollars we spend comarketing has increased over the year, it has declined as a percentage of revenue, as is evident in our Q3 sales and marketing spend of 9%.

For 2006, we have already factored the costs associated with our contractual and anticipated comarketing arrangements into our planning.

The more interesting question for 2006 is, can we grow revenues faster than forecasted through incremental demand generation or off-debt marketing?

We are working on a number of additional strategies and partnerships that leverage our product portfolio, technology platforms and domain expertise to create the sensible, cost-effective marketing reach which we are excited about for 2006 and beyond.

In conclusion, we are pleased with our Q3 performance and we are looking forward to a strong Q4 and a stronger 2006.

And now, I'd like to turn the call back to the operator for your questions.

[OPERATOR INSTRUCTIONS] Jeff Kvaal of Lehman Brothers.

My first question is on the comarketing expense that you talked about.

Certainly we've heard a bit of buzz in the industry about carriers thinking that they might want to raise their own marketing expense and ask you for some of that.

Do you feel that the carriers are asking you to remain on your existing plan or that there's some chance there to raise that?

Jeff, we've been working with the carriers for years on plans such as this.

So while it may be a buzz in the industry, it's certainly not news to us.

We've been operating against these plans for quite some time.

As Michael said, our expense is contractual and our anticipated comarketing arrangements with carriers are incorporated into our 2006 guidance.

We have not seen additional pressures beyond sort of what we have locked and loaded for 2005 and 2006.

But I would say that we've always been very aggressive in this regard.

Okay, thank you.

And would you also mind clarifying your - give us an update on the lawsuit that is underway and to what extent that OpEx ends in December or carries into 2006?

Again, as Michael said, the Jamster litigation expenses are incorporated into our Q4 2005 guidance.

We can't comment on the pending litigation any further than that, except to say that we expect to go to trial some time in November.

Okay.

And then the expense would ramp down then after that, in your view?

Yes.

We wouldn't expect any material cost in 2006, at this time.

Mark Argento of Craig-Hallum Capital.

In particular, could you talk a little bit about what went on this quarter with Verizon, in terms of the subscription revenue?

What's going on in terms of that pipe?

How clean is it across the industry in terms of, we'll call them dead subs?

I know there's been some issues over seas with this particular problem.

Can you just walk us through a little bit of what you're seeing there and how we can prevent that from occurring again?

Sure, Mark.

I'll take that.

Verizon had a specific change that they made and what happened was they had handsets that as the handsets were turning off, when people were upgrading to new handsets, the subscriptions on the old handsets were not automatically being cancelled.

They fixed that problem early in the year, so that now that automatically happens.

But there was a lot of subscriptions that were out there that had not yet been turned off and we were told that that's been cleaned up by July 31st of this year.

So for us, it was a matter of getting back to a new base of revenue to grow off of and we've seen that happen now.

The impact on us, we estimate was in the millions of dollars for this year.

As for other channels outside the US, we haven't had any experience or any impacts from those.

But the other carriers that you're doing subscription revenues on, you're pretty comfortable that those channels are clean?

Yes.

Okay.

And one further one here.

In terms of the on-deck versus off-deck or the portal strategy going forward, if you're looking out, let's say late '06-'07, the percentage of the business that you're driving off the deck versus let's say off of a portal or say a partner portal, does that change materially and how are you really thinking about the business in terms of alternative customer acquisitions?

We don't that off-deck is some kind of a magic bullet.

We're still very aggressively pursuing the carrier channel, as you know, and we're considering a number of opportunities on in off-deck world.

Obviously, off-deck, you still have to control content, you still have to invest in technology, you've still got to acquire customers efficiently.

And we think our unrivaled content portfolio gives us a lot of leverage in the off-deck world, where appropriate.

So I can't comment any more specifically than that, only to say that we're looking at it very aggressively, but we want to do it with our operating model in mind and make sure we do it in a manner that customer acquisition costs don't get out of control.

Kevin Dede of Merriman.

Nice job on the quarter.

Mitch, would you mind offering a little bit more insight on the competitive landscape?

Granted you say your shared gained, but could you give us more insight on who you see are your biggest, toughest competitors and how they're doing in the market?

Sure.

Just as a background, we really believe that the keys to success in this business going forward will continue to be your ability to combine premium content, distribution and technology to bring these games to market on a worldwide basis.

And frankly, we don't believe that there's anybody out there right now in our space who combines these attributes as well as we do.

But that said, I think we're continuing to see very strong product being produced by the quality companies in the space like Game Loft.

I think Electronic Arts has done a good job with the first products that they brought to market, THQ and others.

I don't think we've seen a material change in the competitive landscape, certainly not one that was unanticipated.

Obviously, this is the first quarter where we really saw content directly published by Electronic Arts, but we've been anticipating that for years.

So again, no real change in the landscape, but I think it continues to be a very challenging environment in which to publish and I think that our success in the past gives us a lot of confidence in our ability to continue to compete successfully in the future.

And could you give us a hint on how things are going at Radio Shack thus far?

Sure.

The Radio Shack launch is definitely going according to plan.

We continue, as you know, to view Radio Shack as a strategic marketing channel for us and we're really excited, in particular, that the early 2006 launch of Cingular sales at Radio Shack will really, virtually triple our addressable base through that channel.

So nothing more to add than it's going according to plan.

Sameet Sinha;

Kaufman Brothers.

Just a couple of housekeeping questions.

R&D was fairly high this quarter.

I thought you were done with Tetris in the second quarter and as a follow-up, how should we model this going forward?

Sure.

Q3 is historically a very aggressive period of investment for JAMDAT on the R&D line, because we're teeing up our Q4 and Q1 sales.

So our goal really was to invest aggressively against the porting and deployment of Tetris in Q2, which we realized in our Q3 results.

During Q3 we've invested aggressively both in Tetris and also in the launch of our new products like Doom, SOCOM, NFL, NBA, Tony Hawk's American Wasteland and others.

And I think we will start to see the benefits of that in Q4 and then historically we've seen those R&D expenses start to trail off a bit in Q1.

Okay.

And just similarly on the sales and marketing expense, my assumption had been that you'd continue marketing aggressively.

Obviously, last quarter, second quarter to third quarter, there was a decline, but this quarter you had Tetris.

How come sales and marketing was down so low?

I'm not following.

Is the question, why were sales and marketing so low?

That's right.

I mean it declined sequentially.

Our sales and marketing budget is not used to create demand generation revenue, so it's based on comarketing arrangements that we have in place or specific programs that we run, which we had none of in Q3.

Okay, thanks.

And can you comment briefly on Bowling, what percentage of revenues that was this quarter?

It was below 10% for this quarter.

James Lee of Americas Growth Capital.

Congratulations on executing very well in a very competitive environment, guys.

First of all, maybe Michael you can comment on this.

Share count for 2006, I think you had a number of 26.5 million before - maybe it is from a couple of quarters ago.

Is that still a good number to use a model for 2006?

James, we're working on it because of the Blue Lava note, that number fluctuates based on our stock price at the end of each quarter.

So that number can go up and down.

As an estimate, that's not far off, but again, we're going to have a better view of that next quarter as we determine the outcome of the Blue Lava note.

Okay, great.

Now in terms of comarketing arrangements with the carriers, can you give us several examples of that?

I know in Europe there's a lot of arrangements between the content providers and the carriers where carriers will send SMS messages to their targeted customers to market new game launches or new application launches.

Is that the same type of arrangement in the US?

I just want to get some clarity on that.

No, but we do have a very diverse set of comarketing arrangements with our US carrier partners and with several of our European carrier partners.

I don't want to comment and give you any specific examples at this time, really for competitive reasons.

We think that we do a lot of things in a very innovative manner at the carrier level and I be loathed to disclose those in the context of this call.

But they are not of the type that you alluded to, which is sort of SMS marketing.

Mitch, can you also talk about some of the recent developments in terms of MVNOs?

There's quite a bit out there right now, especially with cable companies going into the wireless resell, focusing on selling data services.

Can you give us an update on what are your specific plans in terms of working with MVNOs?

Absolutely.

We are very bullish about the MVNOs, frankly.

We've formed relationships with several of them.

We were an early supporter of Virgin's.

We'll be supporting Amp'd, Helio and a number of others.

We think that there's tremendous opportunity, primarily because a lot of times the differentiating factor in their consumer value proposition is content.

And so we feel that we add a lot to the equation in regard to those MVNO launches.

So we're actually very excited about them.

Typically they're quite small in terms of the number of subscribers, vis-a-vis a larger, more broad-based carrier offering, but they can be quite targeted in terms of the customer that they're approaching.

And many times that targeted customer overlaps quite well with the demographic that we're seeking to address with our content.

So I would say just in general, we remain very bullish about MVNO.

Okay.

All right lastly, Mitch, can you just talk about the downloading activities in Q3?

Maybe you can comment on, specifically, there were a lot of concerns about portal activities maybe gaining market shares from downloads from the carrier's deck.

Can you just talk about activity that happened in Q3 if you have that information?

I don't have the specific information to address that, but I would say that our belief is that at least on the game side, the off-deck merchandising didn't have a material impact on the carrier sales.

Obviously, that would not be the case for the ring tones.

And we'll continue to watch that market as it evolves in Q4.

Jason Willey of Moors & Cabot.

First question, just kind of wondering - you alluded to this a little bit.

I wonder if you could put a little more color around how much of an impact kind of the platform issues that you saw in third quarter are having on fourth quarter guidance?

In total, we think the platform issues for 2005, including what's happened at Verizon, would have had a couple of million dollars of impact.

Specifically in Q3, not quite as high as that, but throughout the year, particularly on what's happened with Verizon, it's probably cost us $3 million or more.

What about as you look at fourth quarter?

It's factored into our guidance at this point.

As Mitch said, we don't expect a lot more outages at the carriers, but it's something that's just part of the business at this point and we try to factor it into our guidance as best we can.

Okay.

I'm wondering if you could talk maybe a little bit about what you're seeing in terms of shelf life for games in some of the new markets like Western Europe and Japan?

Are things staying on the deck longer or shorter, than what they are here in the US?

I don't think there's been a large change from what we've historically seen in those markets.

I think Tetris obviously, is a product that kind of defies the usual sales pattern in those territories and typically remains on the deck quite a bit longer than other products.

One thing that's been quite encouraging is we've definitely seen a return to gaming in the Japanese market.

I think for a while we'd seen gaming on the decline in the Japanese market, as information services and other kinds of content was ascending.

But I think lately with the introduction of 3D phones and 3G phones by many of the major carriers, including KDDI in DoCoMo, games are sort of back in fashion, and I think that's very positive for us and for the industry.

Okay.

Then finally I was just wondering if you could talk maybe a little bit about some of the traction you're seeing that the new titles, maybe some of the internal IP games putting kind of Doom and SOCOM aside and what's in store from a pipeline perspective there?

I alluded briefly to the performance of Mahjong, which has done very well for us as a JAMDAT branded title.

Our multiplayer pool game is set to release in the first quarter of 2006 and it looking phenomenal.

Very exciting, and again, allows you to play real time multiplayer pool with a friend or a stranger through matching services that we're going to be providing.

We've got a number of other things in the pipeline.

I think on the multiplayer side we're particularly interested in a few titles that we'll be bringing to market later in 2006, where we'll be introducing some team-based multiplayer games, which are actually quite compelling and we've been testing internally for some time.

Evan Wilson of Pacific Crest.

I'd like to follow-up to one of the previous questions and ask it a different way.

Was service interruptions the reason for the reduction in the low end of the Q4 revenue guidance range?

Coming out of where we are in Q3, so using Q3 as our new base rate and the growth that we're seeing, it obviously had an impact coming in at the low end of the range.

And since we build off the base that we have established at these carriers, that obviously is a factor in our forward guidance.

So would it be safe to say that the industry growth rate is similar to what you thought it was going to be coming into the quarter and that nothing has changed as relates to 2006 in industry growth?

Oh, absolutely.

I mean, I think that's an interesting point, because if you look at Sprint, for instance, our October Sprint revenue was the highest revenue we've ever done on that carrier, on the JAMDAT standalone basis excluding Tetris.

It's similar on other carriers.

So we are seeing strong growth continue on many of these carriers when some of these platform issues are removed.

And the biggest one obviously being Verizon, because it kind of reset the base of what our revenue was and it's taken us a while to sort of climb back from where that base was.

So that's why we are confident about 2006 and remain bullish on Q4.

And then to layer on top your market share, you talked about the Telephia report of 31% market share in Q3.

How do you feel about that market share position right now?

I know it's positive, but relative to the trend, do you think you have the product pipeline to increase the market share as we go into 2006 or do you expect that to be something that fluctuates or declines?

Again, looking at other industries, whether it's DVD sales, whether it's theatrical film revenues, whether it's packaged goods video games, I think it would be maybe not unreasonable, but unexpected to have a company maintain 31% market share over a sustained period of time in a highly competitive market.

None of those markets really have a competitor who operates at that level of market share.

And I think it's a testament to our execution skill that we've been able to achieve that in the market thus far.

But I think we do our long-term planning assuming market share more in the 20s.

Got you.

And then as it relates to the lifecycle of Tetris as a property, now that we've seen the natural lifecycle of bowling in the US, what do you think the reasonable expectation for Tetris revenue generation is?

Is it now a year, is it two years?

Can we expect that to be growing after the launch in all the different geographies to maintain for a significant amount of time like we saw with bowling, or do you think it's a shorter amount of time now that we've got a more mature industry and more market entrants?

I think Tetris is a very unusual product in that regard.

It's really the number one rated mobile video game on all platforms, ever.

And we're thrilled with our acquisition of the property and we think that the initial results have been certainly at or above our expectations so far.

And I think more importantly, we think we've really only just sort of scratched the surface of the potential for the franchise worldwide.

We've got a lot of SKUs in the pipeline;

Tetris Battle, Tetris Bling and a bunch of other SKUs which I think will continue to extend the life of the franchise for years and years to come.

But thinking of Tetris like a normal video game, is the wrong way to look at it.

Tetris is really more like chess.

It's really one of those video games that really will be [autonomous] with the concept of mobile gaming over time and I think we're very happy that we bought it and we're very happy with the results so far.

Did you say Tetris Bling?

I'll be looking for that one.

Earl [Love] of Montgomery & Company.

A couple of housekeeping items.

With regards to the branded sports as a percentage of revenues, could you repeat that again?

I think it was 8%.

It was just included in Other branded, but I think it was 8%.

Okay.

And then with regards to Tetris and the revenues that you recorded in the quarter, could you give us any color on whether or not the revenues in the US were impacted because of the outages or did you actually see Tetris on a revenue basis grow from the US segment?

Tetris was impacted somewhat by the Verizon subscription issue, because obviously, Tetris had been distributed on Verizon for quite some time, and therefore, had built up a fair base of subscribers.

With regard to the other service interruptions, I think they affected the industry as a whole and really didn't single out any particular product or publisher.

Okay.

And then it sounds like to me - and please, correct me if I'm wrong, that this type of upgrade was probably long in the waiting and with this upgrade essentially now complete as we go into 2006, do you anticipate that this level of impact could be out there looming maybe a couple of years down the road still, or is this something that the carriers are constantly in the middle of, always upgrading their decks and there are potential outages at any given point going forward in the future?

No.

I think as we did anticipate some of these outages and we were informed in advance about some of these outages, I think the end result was more significant than we had perhaps anticipated or been led to anticipate.

So I think that was really sort of the reason that we had a - that we ended up really at the lower end of guidance as opposed to the higher end of guidance, given that.

Going forward, I really think we've seen the worst of it and I think with these new platforms in place and the significant upgrades that the carriers have made, I really don't anticipate that we're going to see severe problems like this in the future and I really believe that we're going to have a great commercial base for our products going forward.

However, you know, there are always minor upgrades, there are gateway resets, there are things like that that happen from time to time.

But we typically anticipate those and incorporate at least a degree of conservatism in our guidance to account for them.

Right.

But it sounds like '05 was a significant upgrade across the entire industry in anticipation of I guess the volumes that the carriers were seeing.

And it looks like we have a pretty good reset going into 2006 and beyond.

We're very hopeful that that's the case.

And then let's talk about for Tetris, your China license is now in your possession, is that correct?

Yes, as of about a month ago, yes, it's in our possession.

Okay, great.

And then just one follow-up for Michael with regards to embedded revenues in PC, if you have any percentage updates for the quarter?

Around 2% or less.

Combined?

Combined.

Okay.

Thank you very much and congratulations.

By the way, just to address the earlier question, the percentage of League Sports revenue in Q3 was 6%.

Tony Gikas of Piper Jaffray.

A quick housekeeping question.

You might have said this on the call, but missed it.

What was the organic growth in the quarter?

And then a couple of others here.

Your previous EPS guidance for next year was $1.05 and the implied guidance you're giving today looks like maybe $0.86 to $1.08.

What's changed in there?

Where do you see some risk?

Is this in the gross margin?

On the guidance, nothing's changed in the guidance.

We are working through our tax rate for next year.

It's fairly complicated, given a number of international tax credits that we have that we're working on whether they're going to come back, as well as domestic R&D tax credits.

And any tax rate I put out now would not be accurate, so I'm waiting to get that filed during next quarter.

Similarly on share count, we want to nail down our share count, based on what's going on with the Tetris note, which has 700,000 share, plus or minus impact on our share count.

So, you know, we have not changed anything.

We just haven't finalized the share count or the tax rate at this time.

As for the organic growth, I thought we sort of addressed that in the sense that we see organic growth on various carriers that have not experienced yet the platform upgrades like we had on Verizon and that's just the way we've looked at the business.

Our organic growth has sort of been on-track with what we expected at the beginning of the year, ex some of the platform changes.

Okay.

And maybe an update on expanding deck space with carriers and are you finding yourself competing for some of that shelf space with other content offerings like VCast, etc.?

I don't think at this point we're seeing really that much eyeball competition, if you will, with other services like video, etc.

But I think the interesting thing is that a lot of times those new services do provide opportunities for us to get or games in front of customers in some form or another, whether through a marketing message or the like.

So I don't think right now we're really seeing too much competition for the eyeball.

We still believe that there's an audience of people who are buying games regularly and that that's really continuing.

Obviously, we'll keep an eye on that as it rolls out in the future.

And overall deck space, do you see that expanding or remaining relatively flat?

We would hope that it contracts a bit, frankly.

I think our own opinion would be, there's a bit of an oversupply of content in the market right now and we think that the customer value proposition should really be centered around quality.

And so we would like to see, if anything, a slight contraction in the existing shelf availability, even if it costs us a couple of SKUs, because we think overall it's going to be good for the market.

[OPERATOR INSTRUCTIONS] Erik Zamkoff of Morgan Joseph.

I was wondering if you could take us through your visibility metrics in terms of how do you predict revenues going forward and do you have more visibility into revenues today versus you did say one quarter ago or a year ago?

And then also, what would be your expectation on development in Europe and a geography or a carrier that you think is most likely to become a 10% customer beyond your domestic concentration of customers?

Let me take the first part of that question, which is our visibility in terms of revenues.

I think historically we have had excellent visibility regarding our revenues.

I think our ability to project our revenues is unrivaled in the space, over time, obviously.

Even in the face of unanticipated issues like we had in the third quarter and even to a certain degree in the second quarter with the subscription billing changes.

So, I will not at this point, however, provide you with an analysis of that methodology.

I think that methodology is of high competitive value to us, because it allows us to gauge our spending very appropriately.

If we can anticipate our revenues, we can tailor our spending to those anticipated revenues in a way that our competitors can't.

And so, at this stage I would prefer not to get into too much more detail about that.

With regard to where we see another carrier emerging as a 10% carrier, I think the best bet right now is probably Telefonica [Morels].

Thank you.

And what is it that makes you confident about Telefonica versus someone like Vodafone or some of the other regions around the world?

We've had historic strength of Telefonica.

We have a great relationship with them and I think their recent announcement of their acquisition of 02 in the UK will expand their subscriber base considerably.

They already have a lot of strength in the Latin American markets, ect.

So I think in aggregate, they're a high potential to get into that next rung.

Excellent.

Thanks and congrats on nice quarter.

And our final question comes from Will Power of Robert Baird.

Just a couple of questions.

I wonder first, if you could provide us any early anecdotes with regard to take rates on VCast and how you look at the opportunity and importance of the 3G network upgrades here in the US that are taking place at Sprint and Cingular as you think about '06 guidance?

Sure.

First, on the VCast question, we're really not the appropriate people to be asking about that.

We don't offer VCast content and I think that's a question better put to Verizon or one of the companies that is supplying Verizon with VCast content.

But more broadly, with regard to the 3G opportunity, I think there's a couple of things I would say.

One, obviously, as we've long maintained, the most important aspect of 3G to JAMDAT is better handsets.

And we're really seeing that happen in the market right now.

I think the offerings from Verizon and Sprint and Cingular that are coming in the fourth quarter are incredibly exciting and really provide a very good palate for our products.

And I think if you'd seen some of our 3D games like Tony Hawk or Doom RPG running on those new handsets, you'd be very, very impressed.

I think the other interesting thing is that the value proposition for these 3D games and other rich media on the mobile phones is obviously something that's ratcheted up the consumers' expectations, but also the consumers' willingness to pay.

I know at an investor conference in the UK I think last week, Qualcom's CEO, Paul Jacobs, talked about 3D games on BREW and indicated that an analysis they had done of pricing on Verizon, suggested that the 3D games were priced on average 40% higher than the comparable 2D games.

So I think that's something quite encouraging.

And I think we're very happy to see that trend in the marketplace.

Okay.

And then on international expansion, it seems like one of the real opportunities for you all, if I heard the number right, I think international was about 16% of revenue in Q3, which I think was comparable to Q2 as well.

When should we start to expect that number to rise and what's your outlook three to four years from now?

Is that 25% or more at some juncture here?

Yes, we expect to see that go up in Q4 and throughout '06 and we would expect, without specific numbers, to see that number go beyond 20%-25% of revenue next year.

And that does conclude today's conference.

Do you have any closing remarks?

No, I just want to thank everyone for participating.

All right, thank you.

Well that does conclude today's conference.

Everyone have a great day.