GameStop Corp (GME) 2005 Q3 法說會逐字稿

Good morning and welcome to GameStop Corporation's third-quarter 2005 earnings results conference call.

Today's call is being recorded.

At the conclusion of the announcement, a question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS).

I would like to remind you that this call is covered by the Safe Harbor disclosure contained in GameStop's public documents and is property of GameStop.

It is not for rebroadcast or use by any other party without prior written consent of GameStop.

At this time, I would like to turn the call over to Dick Fontaine, Chairman and Chief Executive Officer of GameStop Corporation.

Please go ahead, sir.

Thank you.

Good morning and thanks to everyone for joining us for our third-quarter conference call.

I am Dick Fontaine, the Chairman and CEO of GameStop.

With me today, as is our usual lineup, are Dan Dematteo, our Vice Chairman and COO and David Carlson, our executive VP and Chief Financial Officer.

Historically, we have released our third quarter about a week and a half before the kickoff to the holiday season.

But this year due to the work pertaining to our merger with EB, we are already into the holiday season and to that degree, we will be touching on some early trends of the fourth quarter, but I want to reinforce that we will not be discussing in detail specifics of that quarter.

As we reported this morning before the market opened, GameStop had another solid and I might add a very busy third quarter.

There are three significant aspects to the quarter that I want to stress before I turn the call over to David and Dan.

David will take you through the numbers and Dan will talk about some of the trends in the titles and with a number of the pieces of hardware.

First of all, the quarter was a real test of the resiliency of the GameStop model and it came through with flying colors.

Given the dual challenges of comping against a gigantic new title schedule in 2004 led by Grand Theft Auto: San Andreas where we sold 400,000 copies last year, Fable and other strong titles, combined with the general economic malaise of the third quarter this year with the hurricane impact and the soaring gasoline prices, we were able to achieve our earnings goal and in large part due to the fact that we had a huge increase in our used business from 27.5% of sales in 2004 to 31.9% this year.

The shift to a more value-oriented customer generates more margin per unit but at a somewhat reduced average price point.

A trade-off that we will gladly take and particularly as we continue and have again during the third quarter increased our overall marketshare.

Without a question, the most important strategic initiatives to ensure the long-term success of GameStop were cemented during the quarter as we began the hands-on work of integrating two very large former competitors.

There is no question in my mind that the building blocks of a successful merger are determined from the very first steps taken and the key decisions made and we are off to an excellent start.

The work involved and the time taken to build the integration teams' craft, the POS and systems plans, assess the distribution alternatives, evaluate our international operations and identify the interim and permanent organizational structure and so much more doesn't as yet show up as a positive in the quarterly numbers, but to me it is the single most important accomplishment of the third quarter.

The third point I would like to make is as we roll through November and as we have forecast in the past, we are facing two seismic events that will have a huge impact on the numbers during the quarter.

One, last year we sold 750,000 copies of Halo 2 during the quarter, which was the best-selling software title ever.

While our title lineup this year is strong, there will be no single software title to compare with Halo 2.

Again, this isn't new news.

It is more from the standpoint of reinforcing the order of magnitude.

The second point is the late release of the Xbox 360 on November 22nd.

In all our years in business, we have not had such a major hardware release so close to the kickoff of Black Friday.

And this was a blowout sell-through success but it did have a depressing effect on sales leading up to the launch as people were saving their money and we believe will exert some continued downward pressure on sales as many consumers for the next couple of weeks continue to hunt and hope.

I know you're all very interested in what the future flow will be like on this product and Dan will be taking you through that in just a second.

And with that, I would like to turn it over to David who will get into the numbers of the quarter in more detail.

Good morning.

Before the market opened today we released our sales and earnings results for the third quarter of fiscal 2005.

GameStop's sales for the third quarter increased 28.2% over the prior year to 534.2 million.

This included three weeks of sales from Electronics Boutique from the closing date of the merger.

As expected, comparable store sales decreased 12% for the quarter due to difficult comparisons with the prior year when Grand Theft Auto: San Andreas and Fable, among other titles, launched.

For the third quarter we reported a net loss of 2.5 million or $0.04 per diluted share.

This loss included pretax merger costs of 18.8 million or $0.19 per diluted share and hurricane losses and disaster recovery costs of $1 million or $0.01 per diluted share.

Excluding the merger costs, diluted earnings per share were $0.15, at the high end of our previously released guidance.

Gross margin rates improved 460 basis points during the third quarter in spite of a 35% increase in hardware sales.

This was accomplished through strong used videogame sales coupled with exceptionally strong co-op advertising funds from our vendors in support of their very competitive title lineups.

Comparatively, co-op funds were weak in the prior year quarter as most vendors did not spend heavily in the face of Grand Theft Auto and Halo 2.

SG&A expenses, as expected, were higher than the prior year as a percentage of sales due primarily to expenses related to the relocation of our general office and warehouse to our new facilities in Grapevine, including duplicate occupancy costs for both the new and old facilities and to the negative leverage associated with the forecasted drop in comparable store sales.

Our balance sheet remains very strong with 81 million in cash at the end of the quarter.

Inventory on a store-by-store basis increased by 15% from the prior year quarter primarily due to increased videogame hardware levels, (inaudible), experiencing shortages in the prior year.

Due to tighter supplies of Xbox 360 than anticipated and slower new videogame software sell-through in the first three weeks of November, we have revised guidance for the fourth quarter and the full year.

We now expect comparable store sales for the fourth quarter to range from flat to plus 2%.

However, the strength of the used videogame business and the low margins on the lost sales from Xbox 360 hardware shortages give us the confidence in our forecast per diluted earnings per share to range from $1.65 to 1.70 for the full year.

Now I'll turn it over to Dan for his comments.

Thank you, David.

As mentioned in our press release, the highly anticipated Xbox 360 has had a negative effect on new title releases in the first three weeks of the quarter as core gamers needed to conserve their cash for this big ticket purchase.

As reported everywhere, the very limited quantities sold out in record time and our tie ratios of software and accessories has hit all-time highs.

We are attributing this high tie ratio to the continued growth in our trade-in model, which allows consumers to purchase new games with less out-of-pocket cash.

Going forward, we expect Xbox 360 to be extremely constrained and we will fall short of our sales plan in the category.

But we do not expect this sales shortfall to have a much effect on fourth-quarter earnings due to very low margins of videogame hardware.

As we demonstrated in the third quarter, high levels of used games drive used sales and our inventory per store in the used category has never been higher.

So we are well-poised to serve the budget-oriented consumer that drives sales at this point in the cycle.

Our marketing plans for the Company are in place and we have run our first combined company, FSI, this weekend and we will be running others in the quarter.

In summary, we expect sales for the fourth quarter to be driven by games for the current platforms, handheld systems and used games.

Some of the best-selling titles are expected to be Call of Duty for the Xbox 360 for Mac division, WWE Smackdown for the PS2 from THQ, Mario Cart for Nintendo DS from Nintendo, 50 Cent Bulletproof for the PS2 and Xbox from Vivendi, Star Wars Battle Front II for PS2 and Xbox from Lucas Arts and Nintendogs for the Nintendo DS.

Thank you and I'll turn it over to the moderator for a question-and-answer period.

(OPERATOR INSTRUCTIONS).

Edward Williams, Harris Nesbitt.

A couple of questions for you.

Can you talk about the supply of Xbox 360 hardware in North America relative to Europe and also can give us some color as to how the PlayStation 2 and Xbox software perform and then I've got a couple of others after that?

Sure.

This is Dan.

I can tell you what I know and what I know is we have given a flow of hardware in the United States through the month of December.

So we have visibility through December.

We do not have visibility right now in January.

We do know that Microsoft plans on shifting from air to water freight somewhere around the first of January and that may signal or should signal some slowdown in supply for the first parts of January.

As for Europe, Dick, maybe you have a better idea on Europe.

Europe, as you know, releases on December 2nd and we have gotten our allocation by country and while we would like more, in most of the countries proportionately, we have actually done somewhat better than we have in the US.

Again, it is not significantly so but it looks like with most of the countries it is a reasonable allocation per store.

What we do not have yet or I have not received it yet is perhaps as much visibility post launch for the rest of December for Europe.

I think that is maybe more dynamic than the information that they've given to Dan and our buyers here domestically.

I think your second question was how are PS2 and Xbox titles selling.

As we mentioned, most of the new titles that released the first three weeks of November did not meet our expectations.

If there was a trend among those titles it was that the edgier titles seemed to have a harder time than the non-edgy titles because a couple of titles that just pop in my mind that did meet expectations were like Star Wars and WWE Smackdown and those titles did meet expectations.

So it pretty much lined up with what you would have expected, to have the hard core gamer titles because that gamer was conserving his cash, his or her cash for this big purchase.

I think that's an important point as well.

It certainly does not appear to be a reflection on the quality of those games but as we know and perhaps to a slight degree underestimated is that the core gamer has a very high incident of overlap.

They own both the PlayStation 2 and the Xbox.

Clearly the core gamers moved very rapidly to the Xbox 360.

The overwhelming majority of those moved to the higher priced units.

So clearly they were very taxed from the standpoint of having expendable income.

There is an expectation or at least an expectation on my part that as the season rolls on, some of these titles that may have sold faster earlier will begin to sell a bit better downstream as we get a little bit further away from the initial euphoria of the 360 with the core gamers.

We will have to wait and see if that plays out but we think that is the case and that is a far better scenario than the fact that the games themselves are disappointing.

I don't think that is the case.

And then looking at the 360 for a moment, you mentioned that the tie ratio is, relative to your expectations, is much better than expected.

Can you give us any color as to how it is right now and what you were thinking it would be and then also looking at trade-ins?

Can you give us any indications as to how significant trade-ins are to those who are buying the 360 from GameStop?

Well the tie ratio on the Xbox 360 for software, like we said, it has broken records from any other launch.

So obviously it is better than the PS2 and the Xbox launches from what we have seen and it is fairly significantly better.

But other than that, we don't want to quantify it at this point.

And I mentioned that our used inventory was at an all-time high and that is clearly due to the trade-ins.

And on a per store basis, it is up double digits.

So we won't quantify that but it is significantly higher than we were at this point in time last year.

And then one last question if I could.

How is the PlayStation Portable performing?

Obviously your hardware units -- your hardware dollars dropped dramatically in the October quarter.

How much of that is PlayStation Portable related versus actually having supplies of the current generation consoles and in general, how is the PSP looking going into this holiday season?

I think the PSP may be one of those situations where it is suffering a little bit downstream from the Xbox 360 mania and maybe a little bit more from the hunt and hope.

While we have sold a fair amount of units, I think the truth is, Ed, is that at this point we would have expected it to have more momentum than it has.

As we look at the future promotion for PSP and as I think we get a little bit further away from the 360 hunt and hope, we expect it to pick up.

It is an outstanding machine, as you know.

It has been featured in virtually every article I have seen on the best electronic gifts for the year.

So as long as it has that type of exposure and is a quality unit, we expect that it should close fast.

But the truth of the matter is, it has started somewhat slower than we had anticipated.

One final question if I could.

If you could just give us an idea as to -- the trends that you have seen in the first three weeks in November on new software sales, you are expecting those trends to persist through January.

I just want to clarify that point to make sure that is what is implied in your guidance.

I don't know that we expect the exact same trends to apply.

No.

We believe that some of the weakness was due to core gamers waiting for the Xbox 360 to launch.

Now that it has launched and they've spent their money, we don't necessarily see that continuing.

As well from Thanksgiving until Christmas obviously there is a different consumer in our stores, the gift giver versus as much the core gamer.

So no, we don't anticipate some of those trends to continue through January.

Elizabeth Osur, Citigroup.

I had a couple of questions.

Just getting back to the question of tie ratios, can you give us any sense of tie ratios in terms of accessories on the 360?

Or just how to think about it in terms of prior launches?

I think you can look at it as almost a 2X over prior launches, close to a 2X.

So that -- extremely pleased with the tie ratios there.

Thanks.

And then just any comments about the holiday weekend, any takeaways from the competitive environment in terms of pricing trends that you're seeing from your competitors or just specific consumer spending patterns, things like gift card trends maybe where people are giving gift cards to help people by a 360 when it actually becomes available?

The second question first, Elizabeth.

There's no question that the trend continues with gift cards and they are very strong and they are significantly up from last year and that is a trend that we anticipate is going to continue throughout the year.

Secondly, just in terms of broad comment, I think it is generally assumed and I think I would agree with that, that this was a more promotional Christmas on the price front with all categories, particularly with Wal-Mart leading out early and others following.

We took a position, whether right or wrong, we think it is the right straddle position that that would probably be the case but that we would not go out and burn down gross margin in an attempt to end up with empty sales.

We would begin to use the natural values that we have in the lower price points with our used product and then do some promotion in that category as well against these promotions.

But net net, it seemed to be a more promotional kickoff.

Certainly the huge specials kicking off earlier, the two, three hour specials are getting more and more aggressive and I think we would probably take a closer look at how we want to get a bigger part of that action next year.

Thanks.

I appreciate that.

Mike Wallace, UBS.

Could you comment about software pricing, looking at the PS2 market, I think overall a little weaker than people expected at this point?

Do you think prices are going to come down quicker this Christmas, are you beginning to see some of the publishers give you some more promo dollars and maybe get more aggressive on price cuts before Christmas or do you think that's an '06 event?

And that being said, do you think '06 could be weak from a pricing standpoint or is what's going on now at Christmas not a concern and do you think '06 will be the way you thought it would be?

I have not had any discussions directly with any publishers since Thanksgiving weekend I guess as it relates to pricing.

There will always be some publishers who will take down some titles prior to Christmas because they are not performing according to expectation.

But I don't see a wholesale markdown of PS2, Xbox I titles prior to Christmas.

As it relates to next year, I think as we would always have planned that there will be an average retail price decline of probably at least 10% into next year.

That is what we will carry forward into our forecast.

Again, I don't see a wholesale markdown this fourth quarter but generally we will definitely see a decline next year.

Do you think the $50 prices on PSP titles have held that market back a little bit, do you need to see the prices on PSP games drop next year?

I personally do.

I have had that discussion with several publishers.

I e-mailed them about three or four weeks ago that concern.

But I think the $50 price point is too high and it should be $39.99.

I can say that we have some people in agreement, some people not in agreement.

I do think we will see that price point come down.

Arvind Bhatia, Southwest Securities.

My question is when we talk about the change in the same-store sales guidance for the fourth quarter, can we look at that as how much of that was Xbox 360 shortages and how much of that was the third generation software?

If you could quantify that a little bit, maybe break it down?

And then the second question is on the Xbox shortages, how much of that do you think was just supply and how much of that do you think was potentially some allocation if any?

I think the comp store guidance that we decreased slightly or I guess a little more than slightly for the fourth quarter, most of that related to the Xbox 360 shortages that we're anticipating at this point.

I would say probably two-thirds of it.

I haven't quantified it exactly and then probably one-third due to the slow PS2 and Xbox titles in the first three weeks of November.

On your question on supply versus allocation, I guess there's probably not a retailer in the country that is happy with their allocation.

And not knowing the total allocation for the U.S. market, I can't really answer the question on whether my allocation was fair or not fair.

Microsoft tells me it was fair so I have to believe at this point that it was.

Another question on the 360 attach rate.

How much of that attach rate is being higher than you expected, could be related to the fact that people bought software ahead of the launch and never got the hardware and so that maybe artificially inflated that?

Is that a possibility or you're saying that is not the case but in fact the attach rate is actually higher than historical averages?

I would have no way of knowing and clearly, as usual, people do buy the games ahead of getting the hardware because on midnight when we opened or when anybody opens, they want to just run in, grab it and have their games to play.

I can't imagine much of that would have been bought by people who didn't get a 360.

It just wouldn't compute to me.

There would be some, but I can't imagine there would be a huge proportion of that would be that.

I think the attach rate, our high attach rate speaks more to the fact that since the last time we had a console launch four years ago or whatever, our trade-in business and our focus on the trade-in has been significantly intensified and we have a lot of people who are used to that model and again this is a big-ticket purchase and it's backward compatible and on and on.

So hey they can trade games that they are no playing, etc. and trade those in and their out-of-pocket cash on the games, the new games, are less.

And that is what I attribute our high attach rate to.

Sure.

Last question if I could.

Used products gross margin up versus last year.

Is it a trend that we should expect directionally again in the fourth quarter you think?

I would say directionally in the fourth quarter, the margin on the used games should be similar to the third.

So if you're looking at a trend, yes, that should continue most likely.

Primarily I would say that is a positive that it holds because we will use used videogames more promotionally in the fourth quarter compared to what we did in the third quarter.

If you saw the front page of our flier this past weekend, it was buy two used games, get one free.

(OPERATOR INSTRUCTIONS).

Bill Armstrong, C.L.

King & Assoc.

I have got a couple of questions.

As far as Xbox 360, what is your degree of confidence that Microsoft -- you said you have got some good visibility through December.

What is your degree of confidence that Microsoft will actually supply you with the quantities that they have told you and have you yet received any replenishment shipments since the launch of a week ago?

Well let me jump in with the first one.

As long as we have been in the business, I think we continue to be trained, if you will, to be cautious and conservative.

So I would have to say that I am not counting any chickens before they hatch or any units before they hit the dock.

The total launch in the U.S., while it was exciting and fantastic, is at numbers that are much lower than I would have expected across the board and across the U.S.

So from my standpoint, I am holding my breath to see what continues to happen downstream.

Clearly, it is in Microsoft's best interest to do everything they can to maintain the momentum and doubly so to make absolutely sure that they maintain the momentum with the core and the casual gamer, which is the lion's share of our post Christmas sales.

So I am anticipating they are highly focused on us but I think we are just going to be very conservative.

And have you yet received any replenishment shipments since the November 22nd launch?

No, we haven't.

No.

I think it's next week we get some.

Next week.

Planned.

Second question.

It looks like the gross margins in all your non-used categories; hardware, software and accessories, were up pretty significantly.

I was wondering what was behind that and I was especially surprised to see a 10.7% growth margin on hardware.

As you are aware, the co-op advertising funds, the majority of those now are classified in gross margin and as we said earlier, our co-op advertising funds for the quarter were very significant because of the title lineup from this year's adds that the vendor supported very heavily.

So that is the reason for the increase.

I wouldn't expect that to continue necessarily in other quarters other than the third quarter.

So that is the main reason for the increase in the new video game margin.

Proportionally as well is that it is very strong in that last year at this time, most of the vendors were pulling back on their promotional market development funds because they were in the face of Halo and Grand Theft Auto and they chose, and I think wisely, not to spend into that momentum.

This year, the title base is broader.

There isn't a killer title out there and we are seeing much better support on the marketing and the co-op end.

And then finally just on the store base, what was the store count at the end of the quarter?

How many were opened and closed and how many do you plan to open and close in the fourth quarter?

At the end of the quarter, we had 4416 stores.

We had opened -- on a pro forma basis, assuming we had EB for the whole quarter, we opened 174 stores between the two companies and closed 18 stores.

Let me give you the breakout by division.

We had 3603 U.S. stores, 240 Canadian stores, 171 Australia/New Zealand stores and 402 stores in Europe.

And then in the fourth quarter I believe we anticipate opening somewhere between 80 and 90 stores.

We have time for two more questions.

Tony Gikas, Piper Jaffray.

Good morning, guys.

A couple of questions.

Going back to the tie ratios.

You kindly asked your customers to purchase these bundles and do you think that that drove the tie ratios in accessories and softwares higher?

If you exclude the impact from the bundling, do you think it was still materially higher than previous cycles?

Second question, you talked about the PSP price points being too high and when do you think -- we are sitting here and talking about $59.99 being too high on 360 and PlayStation 2 software?

Is that a year down the road or is that more 18 months down the road?

I can't imagine that that price point is going to hold exclusively either.

And then I have a follow-up.

On the tie ratios, this is Dan, I did the math on that as a matter of fact given the allocation we gave to the Internet.

We only bundled on the Internet okay and the Internet was a very small portion of our total sales.

So I did the math personally and it is insignificant to the increase in the tie ratio.

On the PSP price point, I think your question was on -- was it PSP price point or was it (multiple speakers) and how it relates to the Xbox 360 $59.99.

It seems that $59.99 price point on console games is much more sustainable in my mind than $49.99 on handheld games.

Handheld games typically are single player games obviously.

Some aren't, but most are.

Single player games meant to idle away your time, not as intense as a console game where you are in front of a big screen TV with your friends.

So there's just more entertainment value in a console game in my mind than a PSP or a handheld game.

So typically handheld games have been $29.99 to $34.99, sometimes $39.99.

It seems to be that $39.99 is where the market wants that price point for a handheld game.

On the $59.99, I can see it holding through 2006 for the most part and then 2007, I will have to redecide that given what we see in 2006 but I think mostly through six we can see that.

Okay.

And then what is your view of industry sales in 2006?

Do you expect that the industry will experience growth during calendar '06 and then last question in terms of used inventory as the trade-in business picks up, any concerns that there could be some excess inventory in that regard?

First of all on the 2006 forecast, first we usually comment on that when we give guidance in January or February.

Most analysts are anywhere between flat and plus 10 and we haven't come down on where we think that is at this point.

So other than that, I don't think we're going to comment until we give guidance.

And then your second question was because of our used inventory, is that going to cause a problem on the new inventory markdowns and the answer is absolutely not.

The used inventory is not competition for new front-line titles.

We have proven that time and time again.

What the used inventory is it is inventory and it is products for a value-oriented consumer.

So as such, it may have some competition in the new area with the $19.99 product.

But the $19.99 budget product is, as you know, is republished product, is published just-in-time, delivered just-in-time because it doesn't need to be published or manufactured well ahead of time.

There is no need to take a risk because these are titles that have sold record numbers, have been marked down to this $19.99, enjoy special licensing fees from Sony and Microsoft and Nintendo, etc.

So, no, I don't ever see our increase in use causing a markdown issue in new video games.

I guess part of the question then was as the trade-in business picks up and the current generation software sales start to slow over the course of the next year or two do you see -- I mean, are you being very cautious with the amount of inventory risk that you're taking on that used?

Oh, yes.

I think that we have had much -- we have had a lot of experience at this and we continuously monitor supply and demand.

So we have not seen margin erosion in the used video game category since inception and I don't see it starting now.

We know how to manage this.

I also want to add what we have said before and a lot of people miss is that because of the source of all of our used game coming basically from the customers and not from a third party, in reality we have been chasing supply in this business for about five or six years.

And as Dan says, the pricing models, both the systems algorithms and the individual talent of the buyers, we have never taken a hit to margin and indeed, while our inventory levels going into the holiday season now are high relative to historic norms, they need to be to drive the continued demand and the sales.

So if there is an area of our overall assets and inventory that we need to be concerned about it would be evaluation of our used inventory.

Good job.

Thanks guys.

Gary Cooper, Banc of America Securities.

A couple of questions.

Dan, first on the PSP I don't know if you addressed this.

You talked about software.

Do you think that the hardware price needs to come down as well?

That's the first question.

Second question is what does the new lineup in January look like?

Are there any big games to be released there?

And I guess maybe you could just extrapolate that into the first half to the extent you have any knowledge of what the lineup looks like in the first half.

And then I've got one follow-up.

Thanks.

On your first question on the $299 handheld price point.

Is it too high?

I think if you go back in history, excluding Nintendo handhelds, there have been other handhelds at $299.

I'm going to forget exactly.

Wasn't one something from NEC and wasn't one an EOGO and something else?

Now this machine delivers great value.

Everything from movie play to game play to downloading of music.

So is it too high at $299?

Eventually, yes.

Eventually, yes.

You reach a point with certain level of adopter where you can sell it at $299 and then you'll reach another point where this thing will have to be $199.

I don't know what that point in time is yet but it will come.

I don't know if it is now or if we're there or if it is six months from now or nine months from now.

I don't know the answer to that.

And on your question for 2006 basically title releases, although we didn't really put this together before the call, we have a quick list here.

The first quarter looks pretty strong with Kingdom Hearts 2 and Legend of Zelda and Splinter Cell and I believe Elder Scrolls for the Xbox 360 as well.

So that is just a real brief listing but the first quarter does look like it could be fairly strong.

It's a brief listing but those first two titles are absolute powerhouses.

Exactly.

Okay.

Last question for Dick.

So a lot of retailers have gone to Europe over the years from the U.S. and not done particularly well.

You've got a little bit of head start here with 200, 250 stores.

But could you detail the reason why you think the specialty videogame retailer works in Europe and maybe specifically why you think the used game business is going to work in Europe?

Thanks.

Well first of all let me say, as we said before, we are not coming from our side of the desk with a tremendous amount of history or experience.

But I have spent some considerable time over there since we have made this acquisition and visited all the countries and I think I can answer you in two levels.

One, pretty much the long-term forecast for the growth of the video game business through almost every country in Europe is very, very strong.

Secondly, the market seems to be, to some degree, in terms of its growth and its broadening of its base, maybe a year, maybe even two years behind the growth of the US.

We have got a very good foothold in all of the European countries with marketshare that is, for this very early stage of the growth, quite significant.

We also have and I am ecstatic to see that some very good people over their heading up the managing directors of the country are very in tune with the business.

The last point I would make is the last two days I was over there I attended the MAPIC real estate convention.

We took a look at our growth opportunities, both in terms of what are called neighborhood stores, maybe roughly equivalent to our strips and new mall growth throughout Europe.

While the strip store growth is not as robust as we are going to continue to experience in the U.S., there is plenty of opportunities.

And the amount of new malls being built throughout Europe was much stronger than I had anticipated.

And finally that does not include the amount of expansion in real estate with major investments that are going on in emerging countries like Poland and Czechoslovakia.

And while we are not there and we are only going to jump there if we feel the market is ready, you really have to look at Europe as a market that is not only expanding but new countries coming into that, almost the equivalent of major new states coming into our mix in the U.S.

So net net, I think if you would go and look at some industry figures I think forecast for growth of videogames across the world, I believe you would find that in years three, four, and five it is expected that Europe could grow faster than the U.S. market.

That does conclude our question-and-answer session and our conference.

We thank you for your participation and you may disconnect at this time.