Take-Two Interactive Software Inc (TTWO) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Take-Two Interactive Software, Inc. first quarter financial results conference call. During the presentation all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question and answer session.

At that time if you have a question, please press the one followed by the four on your telephone.

As a reminder, this conference is being recorded Thursday, March 14, 2002.

I would now like to turn the conference over to Cindi Buckwalter, Vice President of Finance for Take-Two Interactive. Please go ahead, ma'am.

Thank you. Good afternoon ladies and gentlemen. Welcome to the conference call for Take-Two Interactive's first quarter of fiscal 2002 and thank you for joining us today.

You should all have a copy of our press release which was distributed this afternoon. If you haven't received a copy, please call

at 212-370-4500 to request a copy.

Before we begin, I would first like to read the Safe Harbor statement under the Private Security Reforms Act of 1995. The statements contained herein which are not historical facts are considered forward-looking statements under federal securities laws.

Such forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to them. The words expect, anticipate, believe, may, estimate, intend and similar expressions are intended to identify such forward-looking statements.

Forward-looking statements involve risks, uncertainties and assumptions including but not limited to risks associated with our future growth and operating results, our ability to continue to successfully manage growth and integrate the operations of acquired businesses, the availability of adequate financing to fund periodic cash flow shortages, credit risks, seasonal factors, inventory obsolescence, technological change, competitive factors, product returns, failure of retailers to sell through our products, the timing of the introduction of availability of the company's new software products and third party hardware platforms, market and industry factors adversely affecting the carrying value of our assets, unfavorable general economic conditions including the current economic downturn and acts of war and terrorism, any or all of which could have a material adverse affect on our business, operating results and financial conditions.

Actual operating results may vary significantly from such forward-looking statements. The company has no obligation to update such forward-looking statements.

Before we begin, I would also like to mention that our class action law suits and our current relationship with the SEC preclude us from discussing and answering questions regarding the status of these and certain other topics beyond what is disclosed in our SEC filings.

Today's call will consist of a presentation by our management team followed by a question and answer period. Presenting to you today from Take-Two are Kelly Sumner, our CEO, Paul Eibeler, our President, Karl Winters, our CFO and Dawn Berrie, our Director of Investor Relations.

At this time I am pleased to introduce Mr. Kelly Sumner, CEO of Take-Two Interactive. Kelly.

Thank you, Cindi and good afternoon.

First, I'd like to take this opportunity to thank all our shareholders for their support. Additionally, I'd like to have a special thanks to our internal development team,

who created Grand Theft Auto III along with our

out Rockstar games team.

In our last call we gave a revenue guidance of $660 million which we are now raising to $683 million. Our EPS guidance which was $1.63 for the year is also being raised to $1.67.

The confidence we have in our upcoming performance is based on the continued strong sales of Grand Theft Auto III, Max Payne, the strong role in the state of emergency and our pipeline of upcoming titles.

Our Q2 revenue guidance is being raised by $20 million moving it to four - 145 million. And our EPS is being raised by two cents bringing it to 25 cents.

In the first quarter of 2002 we realized 283 million of revenue and 92 cents in EPS. Our strong retail performance helped us further reduce our DSOs our days outstanding from 69 days at the end of fiscal 2001 to an all time low of 39 days at the end of Q1 '02.

Of course, going forward our DSO levels are anticipated to seasonally fluctuate in line with the rest of our industry. Our cash flows for Q1 '02

significantly improved DSOs was $76 million, a more than three-and-a-half times increase over our $21 million cash flow for Q1 of last year.

Our cash position continues to improve. As of January 31, our cash position was $31 million with no utilization of our bank lines. As of today, our cash position remains strong and our bank lines remain untouched.

The continued strong sales of our titles have driven our increased market share as evidenced by the latest retail

data produced by

and

. In the United States

reports that we were the second largest publisher of all console products in the first quarter, second only to electronic arts.

Additionally, we had the number two position on PlayStation 2, the number six position on PlayStation 1 and the number four position on Xbox. And Grand Theft Auto continued to be the number one game.

In the U.K.

reports that the company had a 12 percent market share, again, second only to electronic arts.

Additionally, the company had 12 of the top 50 valued PlayStation 1 games, three of the top 25 PC games, six of the top 50 PlayStation 2 games and, again, Grand Theft Auto remained the number one title.

It's important to note that these are the only platforms for which we are currently - we currently produce.

Additionally, the company will benefit from Sony's recently announced PlayStation 2 greatest hits program into which we expect to release four titles during this fiscal year.

This program is expected to drive increased retail sales as well as extend the life of these titles all of which is reflected in our guidance.

Over the last few weeks, many of you have asked for additional details on how we are strengthening the company's organization.

The following are just a few of the key steps we are taking. First, Karl Winters, our new CFO has implemented a set of new - series of new processes and procedures and we'll be strengthening his team by hiring additional senior financial managers.

Additionally, the company has requested that PricewaterhouseCoopers expand the scope of their quarterly reviews for fiscal 2002. And as we previously stated we have changed our revenue recognition policy so that sales to certain customers are not recognized until payment in full has been received.

Also, the order committee and board have approved the adoption of numerous corporate policies to insure the uniformity of our employee's conduct on a worldwide basis.

As announced today in a separate press release would strengthen our board of directors with the addition of Todd Emmel who I'd like to welcome to the company. Todd who has an extremely strong financial background would also chair our order committee.

Don Leeds who recently was one of our independent directors and chairman of the order committee had joined the company as the executive vice president of special projects.

Among other responsibilities, Don will be spearheading our newly formed comprise committee.

Before I hand the call over to Karl and the rest of the team, I'd like to say how

with the continued strength and improvements in our core businesses. And I'd like to once again thank you all for your continued confidence and support and Take-Two.

Karl.

Thanks Kelly. Good afternoon. Our operating results produced net sales of 283 million and earnings per share of 92 cents.

Net sales increased over 75 percent in comparison against net sales of 158 million for the first quarter of last year.

Our publishing revenue represented 68 percent of our business while the distribution business was 32 percent of revenue compared to 49 percent publishing and 51 percent distribution in the first quarter of last year.

The increase in our publishing business as a percentage of total revenue reflects the success of our new products that Paul will discuss later in the call as well as the continued strength of our

titles.

Our platform mix for our publishing business was 95 percent in console software, three percent from PC software and two percent from accessories. Our gross profit margin for the first quarter was approximately 37 percent compared to about 34 percent last year.

The increased margin resulted from two primary factors, the shift in our business mix towards publishing versus distribution as well as the strong sales of Grand Theft Auto III, an internally developed and owned title.

Total operating expenses were fairly comparable on a percentage basis to the first quarter of last year. However, general and administrative expenses were significantly higher on the dollar basis primarily as a result of increased professional fees.

These professional fees included

expanded scope of our regular audit and legal fees that culminated in the filing of restated financials last month.

Due to the strength of our publishing business, we produced significant cash flow during the quarter generating 76 million cash from operations, an increase of 65 million as compared to positive cash flow of 21 million during the first quarter of last year.

At the end of the quarter we had 31 million in cash with no borrowings under our lines of credit as compared to 14 million in cash and outstanding borrowings of about 95 million last year.

During the quarter we extended our European credit line to March 2004.

accounts receivable at the end of the first quarter were approximately 123 million compared to 95 million receiveables at year end. Our accounts receive reserve currently stands at about 36 million representing approximately 23 percent of total receiveables.

It is important to note that our reserves will vary by quarter going forward both in absolute dollars and as a percentage of receivables. But in general we expect our reserves to stay in the high teens to low 20s.

Our DSOs stand at 39 days at the end of the first quarter. This compares to 69 days at year end.

Our success in reducing our DSOs was heavily influenced by the significant demand of our published products early in the quarter due to the holiday season which provided additional time to collect our receiveables.

As a result, we expect that our DSOs will be somewhat higher during the second and third quarters. However, we will continue to actively focus on collection to effectively manage our working capital.

In summary, we are pleased with our operating results this quarter and our current financial position. At this point I would like to turn the call over to Paul Eibeler, our President who will review the quarter in more detail. Paul.

Thanks Karl. Today I will quickly review our first quarter, update you on our progress for the second quarter and give some additional comments on the balance of the year.

For the first quarter that ended January 31, 2002 our console publishing business was driven by the strength of the franchise brands Grand Theft Auto III for PlayStation 2, Max Payne for PlayStation 2 worldwide and Max Payne on the Xbox platform for the domestic market.

We also experienced strong sales for our PlayStation 1 value line that's targeted at the mass merchant retailers.

Our jack of all games distribution business benefited from the launch of Microsoft's Xbox and Nintendo's GameCube as well as strong sales for both PlayStation 2 and PlayStation 1 hardware and software.

As we moved into the second quarter we launched the successful franchise brand State of Emergency for PlayStation 2 from our Rockstar Games label. This title captured the number one spot for NPD fun world data during its first two weeks on the market.

It's important to note that State of Emergency temporarily moved the previous number one title, our Grand Theft Auto III to the number two position during this period. In its third week of sales State of Emergency moved to number two. And our Grand Theft Auto III returned to the number one position.

This week Max Payne for the Xbox will be launched in Europe for the Xbox launch. We will ship our new PlayStation value line game The Italian Job for the domestic market. This movie based title enjoyed strong sales in Europe as a full priced title.

Also, during the second quarter we released several product extensions supporting our existing PC brands. Serious Sam, the Second Encounter, a follow up product to the original Serious Sam game and Tropico, Paradise Island, an expansion pack for our successful Tropico game

in our meeting our expectations.

Mall Tycoon also shipped for the PC early in February.

The second quarter sales for jack of all games distribution business remained strong.

Our distribution business has been built by offering value added services to a growing and varied customer base. For 2002 we will continue to focus on improving both the gross margins and the bottom line of this business.

We are moving Grand Theft Auto III for PC from April to May. The balance of our spring/summer release schedule includes Mafia, Age of Wonders 2, Serious Sam Gold and Tropico Gold for PC, Spec Ops Airborne Assault and Austin Powers Pinball for PlayStation 1.

Smuggler's Run 2 for the Nintendo GameCube and Duke Nukem for Nintendo's Game Boy Advance.

As part of the recent Sony PlayStation 2 greatest hits announcement we are pleased to release Midnight Club and Smuggler's Run as two of the first titles for shipment starting in April.

Based on our catalog of successful PlayStation 2 titles we look forward to the Sony PlayStation 2 greatest hits program and our timely ability to continue to add additional titles to this program.

As we look out to the fall/winter product releases the highlights include MTV's Popular Celebrity Death Match, extensions for our franchise brands Midnight Club and Grand Theft Auto.

Also included is the franchise brand State of Emergency for the Xbox,

and Hidden in Dangerous 2 for PC.

Our position on Duke Nukem Forever for PC remains the same.

We anticipate shipment in the fall/winter time frame. But we have taken a conservative approach and not included this product in our guidance.

I'd like to take a moment to update you on our business with the rental market.

Our three recent franchise brands Grand Theft Auto III, Max Payne and State of Emergency have all performed extremely well in the PlayStation 2 rental market.

In addition, we believe that as a marketing tool, this segment of the business has actually increased our sales and helped build tremendous awareness to these brands.

Our outlook for Take-Two and the future growth in the interactive business remains strong.

Based on our revenue mix from the first quarter of 68 percent publishing and 32 percent distribution, we are confident that our 2002 goal of more than 60 percent publishing and less than 40 percent distribution is achievable.

Our growing catalog of franchise brands and our ability to successfully build new brands is reflected in our market share for next generation systems.

The balance sheet highlights for the first quarter including DSOs of 39 days, 31 million in cash with no bank debt and strong positive cash flow.

This is a reflection of the strength in both our publishing and distribution business. We thank you for your support and we look forward to the rest of 2002 with great enthusiasm.

Operator, we're ready for the first question.

Thank you. Ladies and gentlemen, if you wish to register a question for today's question and answer session, you will need to press the one followed by the four on your telephone.

You will hear a three tone prompt to acknowledge your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the one followed by the three. If you're on a speakerphone, please pick up your handset before entering your request.

One moment please for our first question.

from SWS Securities Incorporated. Please proceed with your question.

Good afternoon guys.

Hi

.

Hi. A few questions here.

First of all, I talked about the break down between publishing and distribution for the year. Do you have a sense for the quarter

where publishing and distribution might come in approximately?

So -- sorry, to restate that you're asking what percentage distribution will take of Q2?

Correct.

It's going to be, again, it will be under 40 percent of the total business.

OK. Good. And can you tell us how many units of Grand Theft Auto III and State of Emergency have been sold worldwide so far?

As you know, when we comment on the numbers of our ship outs. But I mean if you look at NPD fun world I think they're talking - I think it must be something like 2.5, 2.6 million units of Grand Theft Auto. Grand Theft Auto continues to sell approximately 100,000 units a week according to NPD fun world in North America.

And although its sharing a similar success in Europe we obviously got to understand that the in store base of PlayStation 2 is significantly smaller at the moment.

As far as State of Emergency it's been a number one product I think in every territory that it's appeared on at the moment and we're very pleased with the

that we're getting through.

OK. And is this my perception or is this accurate that Grand Theft Auto III is helping generate more sales for Grand Theft Auto II as well? I mean in other words has Grand Theft Auto II seen a pick up?

Well, Grand Theft Auto II I think

for the last two weeks has been the number one PlayStation title

in North America according to NPD fun world and again has been in the top 10 of all the charts that register retail sell through.

It's interesting to note that Grand Theft Auto II never actually achieved the number one position when it was first released but some two-and-a-half years after it was released it got to number on eventually.

, we're very pleased with the strength of the total brand...

Sure.

We couldn't be more excited about that brand going forward.

Yes. It's done great for you guys. And then extending that you know going forward Grand Theft Auto IV can you provide some color on you know where do you guys stand in terms of development?

What's the time frame for that? And you know same thing for Max Payne the future iterations or you know brand extensions for those two?

Well, we've clearly stated that we will be releasing a Grand Theft Auto product in - before winter period.

We haven't announced what it's called or what platform it will be on but we're obviously some way into the development of that title and we're very pleased with the way that it's working out at the moment. As far as Max Payne, we certainly have future Max Payne titles in development but we haven't announced release of those titles at the moment.

I guess I was more focusing on you know the future iteration. I think what you're saying is Grand Theft Auto III on another console and I understand that. But what about the next iteration of Grand Theft?

I mean is that already under development or I mean when should we expect that? Is that 12 to 15 months away or I mean you know provide us some sense there.

Sorry. I was obviously not making myself particularly clear. What I'm saying is that there is a Grand Theft Auto in development but will be released in the winter - for winter period. We haven't said it would be - on what platform it will be on or whether it will actually be the follow on to Grand Theft Auto III.

I gotcha.

It will be an extension for the brand.

I gotcha.

, we're real pleased with the progress in the team at DMA as well as the - you know the guys at Rockstar and the gals at Rockstar that put this product together.

And they can be you know very very proud of their success.

OK. And Austin Powers, can you talk about that property? I know you had one product listed in the next couple of quarters but as far as the next generation products for Austin Powers I mean where do you stand on that property?

We have announced the Austin Powers Pinball for PlayStation 1 for the summer. And then we will have a product on the next generation platform sometime in the fall/winter release schedule.

Fall/winter. OK.

And just last question. How would you guys characterize the launch of Xbox in Europe last night? Do you have any early feedback coming from Europe?

We actually haven't got too much feedback. Obviously Max Payne is a launch title. We're very pleased with the orders that we've had in from the retailers of the Xbox version.

And I think it's really too early to tell. I mean the first real feedback we're going to get is probably about another week's time.

OK. Thanks guys. Good luck.

Our next question comes from

of Commerce Capital Markets. Please proceed with your question.

Thank you. Congratulations guys on a nice year last year and also on a nice quarter.

Thanks

.

A couple questions here. It's nice to get in.

Good to have you in.

Thanks. Number one,

can you just comment, what percentage of that was that of your business in the first quarter?

That was about 41 percent.

OK. And the other thing I wanted to ask related to that and as well as the strength in your other titles can you comment just generally what that meant to you as far as your positioning shelf space at retail?

I mean I've gone into for example a Best Buys store and I've seen better position of your PC product. What has that done to your overall business having the success of a

, Max Payne, State of Emergency, et cetera?

Hot products just give you a lot of leverage in the marketplace and we're you know we're enjoying that right now.

There's no question,

, that having the number one, two and five position on PlayStation 2 in North American and number one, two and three positions in most of the European countries on PlayStation 2 have significantly enhanced our relationships with the retailers and hopefully we will continue to serve them products of equal quality.

OK. And when you look at going forward the potential for obviously people having PlayStation 2 the price point coming down, have you budgeted that into your expectations for this year or do you see that there could be some upside given a higher install base?

First, we're very pleased with the real strong sales of PlayStation 2 right now at the higher price point. But at some point I think Sony will you know reduce the price when they deem or think it's necessary.

We think that even though the price comes down that there'll be certain triple A titles that will still command full price. There will be other titles that because of the increased consumer base of hardware the drop in price will be transparent and then we'll have other prices, other products at different prices because this growing consumer base is bigger than ever before.

OK. And just last question here. If you take a look at your G&A fees - your professional fees for the quarter, if you had to normalize what the impact was of the additional fees you had to incur because of the events that transpired, would you tell us what that cost you in the quarter number one? And number two, related to that, what you expect that would cost you for the entire year?

, we highlighted the fact that there obviously increased fees and that shows up in an aggregate number. I don't think we're going to get into a discussion today in terms of absolute dollar amounts.

I think we can also assure you that we've you know taken a look into the future and done the best we can in terms of forecasting what we expect to continue out for the remainder of the year. So, that's factored into our guidance.

OK. Let me ask you another question. When you look at - you know someone - there was some news that came out today about

. Is there any comment on that because that's come up before about

?

And as you know,

, we don't normally comment on litigation with people. One thing I would make one comment and one comment only for his particular situation is that we were well aware of what they released in October of last year.

As we said on our last call this - anything - any situation with

will not affect our guidance going forward and we will continue to aggressively contend the case.

Thank you very much. Congratulations.

Thanks

.

Our next question comes from

from

. Please proceed with your question.

Hey guys. On the publishing side, can you break out the percentage of the business by each console?

Sure. PlayStation 2, 82 percent,

, Xbox, seven percent, PlayStation 1 six percent, PC three percent and accessories two percent.

OK. Also, you've got a two product royalty free license to the

. What's happening with that?

Well, actually we're looking at that now. Actually, you're quite right.

And when we sold a percentage of

to Microsoft they - apart from that deal, apart from receiving cash, et cetera was the benefit to use the

engine for two future products.

We haven't determined what those products are but we are in discussions with Microsoft about that.

Do you have a date yet when you'll have Serious Sam out on Xbox?

I believe Serious Sam on Xbox is scheduled for the fall/winter period.

Fall/winter. And then finally can you break down on the gross margin side what's the difference in the gross margin on the publishing versus the distribution side?

and you know and we've referred in our SEC filings too kind of a broad based

but we don't break down the margins of the businesses

.

I mean it's really kind of

for distribution eight to 12 percent and publishing I would say you know again it really varies 50, 60 percent. But it really depends.

Fifty or sixty percent on publishing?

Yes. But I really depends on a lot of different things, on the actual product, on the platform.

distribution margin is dependent on how much hardware we're selling in that particular quarter versus how much software and how much value we sell and obviously last quarter particularly for jack of all games because of the launch of the GameCube and the Xbox and the strong sell of PlayStation 2 with a very strong hardware quarter for them.

Do you have a sense for where the gross margins will be for the year on the total business?

I think the - what we said on the last call we believe it's still the case you know mid 35, 36 percent for the year.

And then finally is there a second Grand Theft Auto title for console figure in somewhere in the fourth quarter? Or is that not currently in guidance?

The only guidance we've given is that we will be releasing a title in the fourth quarter for Grand Theft Auto range with unknown name and unknown platform at the moment. There is not two. There's only one.

OK. Thank you.

Our next question comes from

of

. Please proceed with your question.

Good afternoon guys. Congratulations.

Hi

.

A couple questions for you. What would be your operating margin guidance for this fiscal year and next fiscal year? What do you think you can gain in terms of percentage points there year over year?

Really, you know --

, we at this point are comfortable with the guidance we've given in the press release. And really beyond that, in terms of specific operating margins, we are not going to go into that level of detail at this point.

OK.

How about - could you just give us a quick rundown of the revenue model on the rental market in terms of both the software product itself and the revenue share on the rental?

Mostly, we can't get into details because obviously our competitors are maybe listening to this call and might have a different deal with the rental people. But, basically, we sell the products at slightly below what we would - a normal wholesale price.

And we have a rental share of percentage of every - every dollar that's taken from the rental person comes back to Take-Two.

So we actually think that this is not only a good way of making money, but we believe there's actually a tremendous market

as Paul Eibeler said earlier on.

But a lot of people want to play before they pay. And, you know, $50 is a lot of money, but if they can go out and rent a title for $6, being confident this is a game they actually want to own, then they will go and buy the game.

And I think that's definitely

success

and

, which has done very, very well the first three weeks of rental.

, the reduced price that we give allows the rental people -- particularly Blockbuster -- to put more product on the shelf.

So we get a bigger presence at a retail outlet that's extremely crowded, very busy, with a lot of returning consumers coming back on a regular basis. We do -- we can do the revenue share on certain titles that -- that we own or control, and some license titles.

But it gets a little bit more difficult. So we have done a combination of, you know, complete sales to the rental market and/or a revenue share.

OK. So there's a fair return on the software side of it.

Is it fair to say that the rental share could be similar to the motion picture or -- you know, the...

It's based on a similar model to them.

More model

.

We have a slightly higher cost of goods.

OK. And then a couple of housekeeping questions.

Reserves came in, in line or slightly higher than the current industry average. What are the expectations for reserves looking forward?

Are you going to maintain these levels? And, also, where do you think

trend over the next the next two, three quarters?

obviously, what we're going to do on our reserve is analyze them on a quarterly basis. And that's why Carl said they may fluctuate between high teens and early 20s. But certainly in the range that they're in at the moment is something that we expect to hold true the whole of this fiscal year.

As far as the

, we've been saying for approximately a year what we're going to try to do is try to release quarter --

early in the quarter to help the

. That's one of the reasons why we released

early in February.

It's the reason why we're releasing

early in May, to take - obviously,

have to ship out the products and collect that money in the quarter.

Carl said that we expect - I think we are significantly better on

than the rest of the industry at the moment.

We would expect our

to

up on two and three. Not significantly, but they will move up in two and three.

Q4, we will - obviously, because we're shipping

- and the bulk of the shipments going at the - in October for the Christmas selling season, you may see a spike, but nothing compared to what we've seen historically.

OK.

And then last question, guidance on interest expense for the remainder of the year now that you've taken out all of the company's short-term debt?

Well, obviously, we're not expecting any interest expense, but there are fees attributable to the loan, even if we're not using the loan.

So it will be fairly minimal, but there will be fees attributable to that.

OK.

Thanks, guys.

Thank you.

Thanks.

Our next question comes from

with

. Please proceed with your question.

Hi, this is

.

Just a quick question.

Does

-- is there a difference in the margins you earn on that versus some of the other popular titles, such as

?

Well, it depends.

Yes,

. I mean, because it's a fair

developed product and we are the publisher of the product

intellectual property, as we are with

. But it's -- so it

, but it's not significantly higher than anything else that we are publishing on behalf of a third party developer.

OK.

So you do own the intellectual property for

?

No, no, that's not - sorry, I'm misleading you. What I'm saying is we own the intellectual property for

, and so the margins on

...

OK.

...are better than

. We do not own the intellectual property on

.

But we have a publishing distribution agreement with that third party developer.

OK, thank you.

Publishing licensing agreement with that third party developer.

Thank you.

Thank you.

Our next question comes from

of

.

Please proceed with your question.

Hi.

I have a question about the sales and marketing expense. Could you talk about the advertising support you've put behind

in the quarter?

Did you book any

advertising expense in the - in first quarter? Because it seemed like that thing kind of sold itself. So what was behind the big

right there?

Thanks.

Well we certainly - as you're probably aware if you watch TV - we certainly spent some money on

. It's our belief not to just let the product sit there, but absolutely ensure that it's going to be successful.

And it's something that we own the intellectual property and we've developed internally. We can obviously afford to spend more money on television advertising than something that's created by a third party company.

As far as

, there was no advertising booked in our first quarter. The product was launched in our second quarter and we are reviewing where we stand on advertising as far as radio and TV at the moment with

>

significant advertising, you might have seen some small print advertising in anticipation of the product. And

, we really view the advertising behind

as an investment in building that brand.

I don't think there is anyone out there in the video gaming interactive world that doesn't know about

. So a compliment is an extremely strong word of mouth campaign and print campaign.

Yeah, I think you're right. I think it's pretty well known.

What was the sales - the revenue breakdown in

between the U.S. and international?

We haven't - we don't break that down.

But, I mean, obviously, as you know, there's more PlayStation

over here than there is over there. Roughly, it was probably 60-40.

OK, thank you.

Thank you.

Thanks,

.

Our next question comes from

with

. Please proceed with your question.

Good afternoon.

Actually, one clarification.

You had indicated before that about 41 percent of your revenue came from

. Could you just say if that's total revenue or publishing?

Our total revenue.

Forty-one percent was total revenue.

OK, great. Thanks.

And also, could you just comment a little bit about the number of titles that you currently have in development and the number of skews you expect to ship in the current fiscal year, and if you can, for next year?

Right.

Well, for this year, we have 25 skews still to be released as of the end of Q1. Six PlayStation

skews, five PlayStation

skews, 11

, one

, one

and one

, making the total 25.

And we still have approximately 60 titles in development which

stand this year and next year.

Those titles in development don't necessarily - don't always - we don't always count on the

.

Where we take a product to another platform from its original. So if we have - if we have

and it's a

release, we're not necessarily counting the

release in that skew count.

Actually, going off of that, how long might it take for you to take -- to produce an

version of

following and receiving the code for the - from the

game?

Well, if that's what we were to do, we would be working in parallel with

, one of our

in

who produced the

version that did very well.

We work in parallel. I think it took them - on the

version -- something like eight to 12 weeks.

OK. And then another question is, do you have any games on the cusp of the April quarter right now or that you expect might be on the cusp of the July quarter?

No, I don't think there's any on the cusp.

OK.

And then, Carl, if you could talk a little bit about some of the changes that you've made at this point, and also kind of what your inventory target is for, say, the year end?

I celebrated my one-month anniversary, and at this point I think I've had time to, you know, do a pretty good assessment of the team.

We indicated we're going to make some additional investments in a few more senior financial managers. And I think that will just help to, you know, further enhance the company's internal control system and just really, you know, lighten the load for a few of the folks here have really worked very hard at building the company to where it is today.

In terms of inventory targets, we typically don't -- as I understand

history -- get into, you know, specific working capital

. But obviously with the distribution business, it follows a pattern of seasonal sales, and we - we'll manage that as well as the rest of the working capital.

OK, great. Thank you.

Thanks,

.

Ladies and gentlemen, as a reminder, to register for a question, please press the one, followed by the four, on your telephone.

Our next question is a follow up from

from

. Please proceed with your question.

Hi guys.

Can you talk about your distribution agreement with

? Is that still ongoing?

Actually, it's - we have a couple of titles that are still part of that agreement.

The

company has decided not to renew that agreement I believe early in the year. I'm thinking of the titles that we have.

and another PlayStation

title which I can't remember.

Those are all out, Kelly.

Those are all out.

There's nothing new to come from

.

Can you talking about

, what they're currently working on, if they're focused on specific platforms or genres?

Well they certainly could focus on genre, because they're - you know, all their titles have come in the strategy arena, such as

and

. They are working on new titles and it will be in that arena.

But we haven't announced them, and I'm not willing to announce them on the call at the moment.

Also I had a question - I was reading the

, and the question is, in the

, it says you internally developed and released "Max Payne" for both Xbox and

.

Those were developed by

. Do you own

?

Can you clarify that information?

You're right.

- we don't own

.

produced the PC code, and we took that PC code and developed it into PlayStation

and Xbox code. And that was with

Studios in

in Austria, and

Canada in Toronto.

OK, thank you.

Thank you.

Our next question is a follow up from

with

. Please proceed with your question.

Hi.

I have two questions. One is, could you give us - we've got the balance sheet data for capitalized software.

Could you tell us what went in and what got burned off in the quarter?

That's the first question. And then, second, could you give us an update on the system conversion and the consolidation of all those different computer networks you got there?

Thanks.

I think with regard to your first question, we'll be publishing the 10Q here in the near future and we'll have more to say at that point in terms of those expenses.

So I'll just hold comments on that for the moment, if you don't mind. But with regard to the system, I think suffice it to say that the company has taken a - undertaken a significant effort over the last four or five months of implementing the system.

We are just at the point, really, of finishing some of the fine tuning of that system and we're pleased with the additional information, details that we can get from it that our old systems did not provide. So I think we're in good shape on that front.

Could you give us a characterization on what the new system looks like? I mean, in terms of globally integrating everything, what components it's got in it, just kind of an overview?

It's a main line J.D. Edwards system. And, at this point, we've implemented it into the majority of our U.S. operations.

We have a schedule in mind for rolling it out further worldwide, but we're going to take that as it comes. As you know, our worldwide operations are more sales to distribution points than the bulk of the - you know, distribution business

here in the U.S.

So then you have it implemented for publishing and

both of them in the U.S.?

Yes.

OK. Thank you.

Our next question is a follow up from

of

. Please proceed with your question.

Thank you.

The way I calculate it, your distribution revenue is up around 12.5 percent for the quarter.

I was wondering if you could just comment on what your expectations are as far as - you know, if you expect that growth to continue for the rest of this year?

It's going to be - what we said in previous calls,

, was that we're not expecting particular growth in distribution.

What we're expecting is to maximize the gross profit from that division. So our expectation isn't for tremendous revenue growth.

Anything between 10 and 12, 13 percent, we'll be quite happy with, even though that's lower than the growth of the industry.

OK.

And I was wondering, would you - could you break out the reserves that you had for publishing and distribution or at least qualify given how you've changed your manner of recognizing sales? What that's done to your reserves, if anything, to the distribution side?

Well, as you know, we don't - we don't break them out. There's a 23 percent global reserve on our total accounts receivable.

We've always said that the distribution company needs a far slower reserve than the publishing company. And we still believe that, because of the ability to return product to - to the vendor rather than - we're the vendor on the publishing side.

So we haven't broken it out. What we wanted to do is make sure our reserves and total were in line with the expectations of the market and our competitors.

OK.

And last question -- the rental market, it sounds intriguing.

I wonder if you could just tell me what percentage that was of your business and what you think it could be. And if you can't do that, the other and/or question is, could you tell me what impact that - you think that could have on industry sales at retailers?

Well we don't -- we haven't broken it out, and we don't break it out. But I think that - I think that the

market is a good tool.

As I say, if you've got a good product like titles like "Grand Theft Auto III," "Max Payne" or "State of Emergency,"

is a great opportunity to make sure that people actually do buy it.

If you've got a questionable product -- a question of

, it's certainly not something you want to go and invest in because they're going to play it and decide not to buy it. But certainly, good products will benefit, we believe in rental.

I get -- you know, a follow up to that.

Is there any way you can maybe quantify what the sale

might be in some of these rental markets from product that you put in and people tried it, then they ultimately buy it and you have to - you have to replenish that product? If you can give us an idea maybe of what the sale

has been like?

Well, I mean, in North America, Blockbuster

actually selling the product, they're actually only renting it. So the best way I think is to go to the local game store or

store and find out how we're doing.

OK, fair enough.

Operator, we'll take one more question if there are any other additional questions.

Sure.

Thanks,

.

Our next question is a follow up from

from

. Please proceed with your question.

Yes, this question is for Karl. The tax rate for the quarter was a little bit above where I had modeled.

Can you tell us where you expect the annual tax rate to come in for the year?

, I think the tax rate you're looking at will be representative of what we expect going forward without getting into a specific percentage discussion.

I think you probably saw a shift in the percentage from last quarter and

. I really -- I think the shift in our business

the publishing and the sourcing of that from overseas.

OK.

And then finally, help me understand this shift in "Grand Theft Auto III" on PC.

I think, Paul, you said that that

. In other words, from Q2 to Q3...

Yeah.

...but at the same time, your guidance for Q2 is actually going up.

Is that - is that the way to read this?

I think that's - probably any way you can read it would be fair.

OK.

Yes - I mean, we had a very strong start to the Q. As we've stated previously, we really want to try to move forward into the beginning of the quarter.

The strong

of the quarter has allowed us to move "Grand Theft Auto III" into the

of Q3, and we will continue to do that while

to try and keep our

at a very aggressive level.

And,

, that's really a slight movement. It just shows the strength and flexibility of our -- you know, of our release schedule. Because it was -- it was always scheduled for April.

So we're just moving it to the beginning of May.

Help me understand expectations for that particular product vis-à-vis the PlayStation

product.

Well I'd love to say it's the same, but

,

. I mean, obviously PC products don't sell in quite the same quantities.

If we could have anywhere near - I don't know, 20 percent of the sale of PlayStation

, I think we would be very happy with that.

Great, thanks a lot.

Thank you very much for joining us today. If you have any follow-up questions, please direct them to either

,

or myself. We'll be here for the next couple of hours and here all day tomorrow.

Thank you very much for your continued support.

Ladies and gentlemen, that does conclude your conference call for today.

We thank you for your participation and ask that you please disconnect your line.

END