Take-Two Interactive Software Inc (TTWO) 2003 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Take-Two Interactive 2nd quarter 2003 financial results conference call.

At this time, all participants are in a listen-only mode mode.

A brief question-and-answer session will follow the formal presentation.

If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Cindi Buckwalter, Executive Vice President of Finance.

Thank you, Ms. Buckwalter, you may begin.

Thank you.

Good morning ladies and gentlemen.

Welcome to the conference call for Take-Two's 2nd quarter of fiscal 2003, and thank you for joining us today.

You should all have a copy of our press release which was distributed earlier this morning.

If you haven't received a copy, please call Amalie Van Cleave at Euro RSCG Middleberg at 212-699-2723 to request a copy.

I would first like to quickly review our Safe Harbor statement by reminding everyone that the statements made during this call that are not historical facts are considered forward-looking statements under Federal Securities laws.

These forward-looking statements are based on the beliefs of our management, as well as assumptions made by, and information currently available to, us at this time.

Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.

These important factors are described in our filings with the SEC, including our annual report on Form 10-K for the fiscal year ended October 31, 2002, and in Form 10-Q for the quarter ended January 31, 2003.

Before we begin the call, I would like to also mention that our current relationship with the SEC precludes us from discussing and answering questions regarding the status of the SEC investigation 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.

With us today from Take-Two are Jeff Lapin, our CEO, and Karl Winters, our CFO.

At this time I'm pleased to introduce Jeff Lapin.

Jeff?

Thanks Cindi.

Good morning and welcome to Take-Two's earnings call for the 2nd quarter of fiscal 2003.

During today's call we will review the company's financial performance for the 2nd quarter and six month ended April 30, 2003 and provide our outlook for the balance of the year.

Then I'd like to highlight some of the significant product announcements we made during E3, our annual industry trade show, and provide some initial perspective on our fiscal 2004 product pipeline.

Finally I would like to comment on the implications for our business of some of the key industry and Take-Two announcements made at E3.

We again enjoyed strong financial results in the 2nd quarter.

Revenue for the quarter was 194.2 million, an increase of 14% compared with 170.3 million in revenue for the 2nd quarter of 2002.

Earnings per share were 36 cents versus EPS of 25 cents a year ago, an increase of 44%.

Operating cash flow was approximately $22 million and we ended the 2nd quarter with over $188 million in cash.

Looking at the first half of the fiscal year, revenue was $603 million, up 33% from 453.3 million for the first 6 months of fiscal 2002, and earnings per share was $1.55 year to date versus $1.16 in the first half of 2002, a 34% increase.

Karl Winters will review our financials in more detail in a moment, but let me share a few general observations first.

Our publishing business was led by the continued strength of Rockstar's Grand Theft Auto, Vice City, Grand Theft Auto 3, Max Payne, and Midnight Club 1, and the launch of Midnight Club 2 for PlayStation 2.

Two of Gathering's new PC releases, Viet Cong and Tropico 2: Pirate Cove, were also top products for us for the quarter.

And Conflict Desert Storm from Gotham remained a solid performer.

On the distribution side of the business, we benefited from our efforts to enhance the performance of our Jack of All Games subsidiary, not only have we taken cost out of the distribution operations by consolidating facilities, but we also have seen progress towards our goal of improving margins.

In the 2nd quarter, we achieved the best margin in the history of Jack of All Games and we will continue to focus on maximizing the contribution from our distribution business.

I would like to briefly mention some of the key personnel changes since our last conference call.

Heinz Henn joined Take-Two as our Vice President of International Operations overseeing our international locations.

Heinz has a wealth of executive management and entrepreneurial experience, including senior positions at BMG Entertainment International and EMI Music Worldwide.

I'm very pleased to announce the promotion of Cindi Buckwalter, who most of you know, to Executive Vice President.

Cindi will continue to work with the investment community and have an expanded role as a member of our senior management team.

I would also like to comment on the announcement in today's release that Paul Eibeler has not decided to return to the company after his medical leave of absence.

Paul has been incredibly generous with his time and insight aiding with my transition into the CEO role, and will continue to provide counsel to Take-Two on an as-needed basis.

Speaking on behalf of the entire company and for myself personally, I certainly wish Paul the best.

Karl, Cindy and I will assume the majority of Paul's duties.

To date we have not made any purchases under our stock buyback plan as we continue to evaluate business opportunities where we believe we can effectively utilize our cash resources.

I will now town the call over to Karl Winters who will review our financial results in more detail.

Following Karl's comments, I will discuss our product pipeline and industry developments.

Karl?

Thanks, Jeff and good morning.

We are pleased with our operating results for the 2nd quarter.

Net sales were 194.2 million, an increase of 14% compared to 170.3 million a year ago.

Net income for the quarter was 15.2 million or 36 cents per share, compared to net income of 9.6 million or 25 cents per share in the 2nd quarter of 2002.

In the 2nd quarter the product mix in our publishing business was more evenly balanced among our new products and catalog titles than in recent quarters, which indicates the strengthening and diversification of our product portfolio.

Our top 10 products represented approximately 53% of total revenue for the quarter, with Grand Theft Auto, Vice City for PlayStation 2 contributing about 19% of total revenue.

[INAUDIBLE] we shipped in Q2 also proved to be meaningful contributors to the quarter's results.

Midnight Club 2 for PlayStation 2, which we shipped late in the quarter, was about 14% of total revenue, while Vietcong for PC was about 4% of revenue, and Tropico 2: Pirate Cove for the PC was about 3% of revenue.

We also experienced solid sell through for Conflict, Desert Storm for PlayStation 2 and Xbox, and many of our other catalog titles, including Grand Theft Auto 3, Max Payne, and Midnight Club 1.

Our gross profit margin for the quarter was 37%, which is comparable to our gross margin in the 2nd quarter of last year.

We are pleased with the gross margin for the quarter, considering our sales mix which included a much greater percentage of distribution business compared to Q2 last year.

For the quarter, our publishing business represented about 65% of total revenue, with distribution accounting for the remaining 35% compared to 79% publishing and 21% distribution in the 2nd quarter of last year.

We achieved comparable margins this quarter given our action mix because we were successful in expanding our distribution margins.

As we stated in our 1st quarter conference call, one of Take-Two's corporate objectives has been to increase the profitability of Jack of All Games, the largest distributor of video game software and hardware in North America, servicing 20,000 plus retail storefronts.

In the 1st quarter, we made meaningful progress toward this goal when we consolidated our distribution operations by closing two warehouse facilities.

Our management team has also become more sharply focused on maximizing our product mix and striking more attractively priced deals, and in some cases signing exclusive distribution arrangements.

Lastly, we realized further margin upside by taking advantage of buying opportunities presented to us due to the excess supply of software titles in the market following the holiday selling season.

As a result of these factors, our 2nd quarter distribution gross margin was more than double that of the 1st quarter.

We believe this level of margin improvement is more positive than we expect going forward because some of the deals we made were based on short-term supply, demand, and balances.

We believe our Jack of All Games management team will continue to pursue supply opportunities available at this stage of the console cycle to meet their customers' growing demands.

We expect gross profit margins for this business to remain strong for the next several quarters.

Our margins were also favorably impacted this quarter compared to last year's 2nd quarter because the platform mix in our publishing business this year consisted of a greater percentage of PC products, which generally carry higher margins.

About 83% of our publishing business was from console software, with about 14% from PC products, and 3% from accessories and hand-held products.

This compares to 94% console, 5% PC, and 1% accessories and hand-held products in last year's 2nd quarter.

One other area of note regarding our sales mix for the quarter is that our publishing revenue was down slightly quarter over quarter.

Because of the unprecedented success of Vice City in the 1st and 2nd quarters, our publishing business was somewhat front end loaded this year as against last year, with publishing revenue up more than 30% compared to the first six months of last year.

We expect that our publishing business for the remainder of fiscal 2003 will be relatively equal with last year, and that it will represent about 60 to 65% of total revenue for the back half of the year, with this distribution accounting for the balance.

This should result in another year of record growth for our publishing business with fiscal 2003 publishing revenue up by about 15% over fiscal 2002.

Moving to the individual components of cost of goods sold, our product cost increased in absolute dollars and as a percentage of revenue this year because of the significantly higher percentage of distribution business in the quarter, which naturally carries higher product costs in our publishing business.

Royalties decreased in both a dollar basis, and as a percentage of revenue, due primarily to the high royalty rates attributable to state of emergency and last year's 2nd quarter, and about 2 1/2 million dollars in write-downs of prepaid royalties last year.

Our software development costs increased in both a dollar and percentage basis, principally due to the amortization development costs for Midnight Club 2 which we shipped this quarter.

Our total operating expenses were up 4% quarter over quarter, but declined as a percentage of revenue.

Selling and marketing expenses came in about where we expected, relative to our sales levels, reflecting continued advertising and promotional support for our current portfolio of products, as well as some initial marketing for our new releases.

Our general and administration expenses were down significantly due to reduced professional fees and other expenses compared to last year, when we were expanding our financial and operational infrastructure and completing our restatements.

In this year's 2nd quarter, we realized a credit to G&A of about $800,000 arising from insurance proceeds covering attorneys' fees related to our restatements last year.

Excluding the benefit of this credit, our G&A expenses were right in line with expectations.

R&D expenses increased significantly over last year due to the acquisition of Angel Studios in November and Barking Dog in August, as well as additional staffing in our development area.

To briefly recap our six month results: Revenue increased 33% to 603 million, gross profit margin was approximately 39% versus 37% last year, operating margins were about 18% versus 17% last year, and earnings per share of $1.55 for the six months represented a 34% improvement over the first half of last year.

Now, I would like to move to the balance sheet, which I'm pleased to report is the strongest in Take-Two's history.

We continue to operate on a cash flow positive basis, generating approximately 22 million in operating cash flow.

At the end of the quarter, we had over 188 million in cash, as compared to nearly 70 million in cash at this time last year, and 108 million at year-end.

Net accounts receivable at the end of the 2nd quarter was approximately 100 million, compared to 121 million in receivables at the end of the 1st quarter and 107 at year-end.

Our DSOs were 46 days in the 2nd quarter.

Our accounts receivable reserve currently stands at about 43 million, representing approximately 30% of total receivables.

Inventories at the end of the quarter were approximately 71 million, down from about 77 million at the end of the 1st quarter and 74 million at the end of last year.

The significant majority of our inventory relates to our distribution business, with close to 60% of the distribution inventory consisting of products with cost of goods below $10.

On our last quarter call, we said we expected our inventory leveling to be down significantly in the 2nd quarter, as Jack of All Games had taken advantage of numerous buying opportunities following the holiday season and was working this inventory through the channels.

That has been successful in this effort, as indicated by nearly doubling their revenue and significant expansion of the gross margins this quarter, which I discussed earlier.

They have continued to see attractively-priced buying opportunities which they have pursued in the 2nd quarter.

As a result, we have allowed our inventory levels to remain higher as we expect these buys to continue to fuel significant growth in our distribution business.

Turning now to our prepaid royalties and capitalized software development costs.

Our short and long-term prepaid royalties in capitalized software stood at about 32 million at the end of the 2nd quarter, representing about 62 products in development.

We expect to release about 40 products in total in fiscal 2003, 15 of which have already been shipped.

Moving on to guidance.

We are increasing our guidance for fiscal 2003 to 975 million in net revenue, and $2.28 in earnings per share.

We are reiterating our guidance for the second half of fiscal 2003, and issuing guidance for the 3rd quarter ending July 31 of 142 million of net revenue and 16 cents in earnings per share.

In summary, we are pleased with our operating results for the 2nd quarter and our current financial position.

Our revenue has increased 14%, and we realized a $7 million increase in operating income year-over-year.

Our efficiencies this quarter led to a 250 basis point increase in operating margin to 13%.

We generated operating cash flow of approximately 22 million in the quarter, we have over 188 million in cash and no debt, and we are projecting top-line growth of 23% and bottom-line growth of over 25% in fiscal 2003.

At this point, I'll turn the call back over to Jeff.

Jeff?

Thanks, Karl.

Now, I'd like to share a few comments on the lineup we introduced at E3 earlier this month.

I think those of you who were able to join us at our investor and analyst presentation would agree we had a great show.

Take-Two has the strongest creative team in the industry today.

We are unmatched in building powerful, original brands, and our three publishing units, Rockstar, Gathering, and Gotham are focused on seizing opportunities in their respective markets.

The Rockstar lineup included extensions of several of our core franchises, as well as further news about our new Manhunt brand.

Grand Theft Auto, Vice City for PC arrived in the stores on May 13 in North America, and May 16 in Europe.

The PC version of our top-selling PlayStation 2 game has been rebuilt from the ground up and includes many new features such as the customizable MP 3 radio station.

Midnight Club 2 for PS2, the sequel to the Greatest Hits PlayStation 2 launch title, shipped in April.

Midnight Club 2 features unprecedented racing technology, online game play, and three cities in which to race.

The Xbox version of the game will be in stores in early June, with the PC title shipping later that month.

Max Payne 2, The Fall of Max Payne for PC, the next installment of our blockbuster Max Payne franchise, will be released in the 1st quarter of 2004.

The third-party action title was shown to a select audience at E3 and the response was absolutely outstanding.

Max Payne 2 will come out on PS2 and Xbox in the winter, following in the footsteps of the original Max Payne success as a PS2 Greatest Hits and Xbox platinum hit title.

We also introduced Manhunt for PS2, the next project from Rockstar North, which will be on the retail shelves in the 4th quarter of fiscal 2003.

The Gathering lineup also included several line extensions and an exciting new title, all slated for release in the fall of 2003: Mafia for PS2, the console version of our classic Mob PC title;

Hidden and Dangerous 2 for PC, the next installment of our Mission-based World War II game;

Railroad Tycoon 3 for PC, offering the golden age of railroading in an amazing 3-D environment;

Space Colony for PC, a new title that follows a band of interstellar misfits as they try to colonize the galaxy.

Gotham Games previewed several new license brands in the next installment of the Conflict, Desert Storm series.

The Great Escape, scheduled to ship this quarter, is based on Steve McQueen's classic P.O.W. movie.

It will be available for PS2, Xbox and PC.

Starsky and Hutch, a driving and shooting game based on the '70s TV series, will ship in the fall for PS2, Xbox and PC.

Celebrity Death Match, based on the popular MTV series, is targeted for fall '03 on a broad range of platforms;

PS2, Xbox, GameCube, Playstation, and PC.

Conflict, Desert Storm II - Back to Baghdad returns to the 1991 Gulf War with a new level of squad-based combat.

It's expected to ship in the fall for PS2, Xbox, and PC.

The Great Escape, Starsky and Hutch, and Conflict, Desert Storm will ship in North America only.

The E3 lineup represents a just a sampling of the products targeted for release over the next few years.

In total, we are currently working on, or have development plans for, over 90 SKUs, about 25 at Rockstar, 40 at Gathering, and 25 at Gotham.

Obviously, our creative engines are running on all cylinders.

We also look forward to expanded distribution of Rockstar's products in Asia in the near future.

Also at E3 we announced the acquisition of Frog City Software in another move to expand our development resources.

Based in San Francisco, Frog City is the studio responsible for the Imperialism franchise, and has also done work on our own Tropico 2: Pirate Cove title.

Frog City will be operated as part of Gathering, and is already hard at work on an original project for us.

And we were pleased that Sony announced Grand Theft Auto, Vice City as the game of the year and best adventure game at E3's Publisher's Choice awards.

After returning from E3 and spending a lot of time evaluating the significant time and expense involved in preparing for and attending the show, we're planning to scale back somewhat our attendance at E3 next year.

We will continue to hold meetings with the investment community, retailers, and hardware vendors, and have our analyst lunch, but expect to reduce our E3 expenditures next year.

Coming off a record year in 2003, I would like to provide a little color on our 2004 lineup.

We previously announced that The Warriors and Max Payne will be released in the first half of fiscal 2004.

We currently anticipate that Max Payne 2 will ship in Q1, and the Warriors will ship in Q2.

In addition, Rockstar has a significant Xbox SKU currently scheduled for Q1.

In the back half of fiscal '04, we have up to three other Rockstar titles, one of which will be the next version of Grand Theft Auto.

We also have a comprehensive lineup from Gotham and Gathering planned for next year.

Additional details on our 2004 pipeline will be provided in our next call.

Before we take your questions, let me offer a brief perspective on some of the key industry and Take-Two developments we saw at E3.

Sony and Microsoft took a first pass at reducing hardware prices.

Although any incremental pricing reduction is helpful, we were disappointed in the relatively meager amounts of the cuts.

However, we believe the initial price reduction signals a move in the right direction and further price cuts are coming later in the year, which will clearly benefit Take-Two and the entire industry.

Based on current pricing levels, we expect industry growth rates of about 15% in 2003.

We are encouraged by Sony's announcement of the new PFP hand-held devices.

We believe it could provide an opportunity to further extend our strong franchises and drive incremental revenue.

We are excited about our exclusivity deal with Sony, whereby the next version of Grand Theft Auto will debut exclusively on PlayStation 2.

However, at this point, we're not providing any additional color on the terms of that agreement.

After spending a busy week at E3 with all the major hardware vendors, retailers and other software publishers, what is particularly clear to me is that Take-Two remains in an excellent position for future growth.

In an industry where unique and compelling content is the key to success, we have a proven track record of creating products that consumers want to buy.

We have an increasingly diverse publishing business anchored by Rockstar, with growing contributions from Gathering and Gotham, and we have demonstrated the ability to expand and enhance the performance of our distribution business.

Thanks for joining us today.

Now we'll be pleased to take any of your questions.

Thank you.

Ladies and gentlemen, at this time we will be conducting a question-and-answer session.

If you would like to ask a question, please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue.

To remove your question from the queue, please press star two.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Our first question comes from Mr. Heath Terry with Credit Suisse First Boston.

Please state your question.

Thanks.

Jeff, I was wondering if you could just give us a little more detail on the number of products that are planned for the number of those 90 SKUs that are in development that are planned for '04, and kind of how those might break down on a platform basis?

Heath, we don't have that information yet to give out.

But in the next couple months we will break that out for you in detail.

Okay.

Are you expecting the SKU count to be up from this year?

Or roughly the same?

It's roughly the same, to a little up.

Okay.

And then can you also talk to us, there was a the lot of talk about margins and the distribution action being up because of some of the opportunities that you've had.

Can you talk to us about what you think steady state margins for that business are, now that you've taken some of the other expenses out of it and have had time to look at it, and what you're targeting as far as the percentage of revenue from that business on a normalized basis?

I'll give that one to Karl.

Hi, Heath.

As you know, that business has performed very well for us recently and we're very pleased with the progress it's made.

The margins range, depending on where we are in the cycle, from the lower end, as hardware with, for instance, that we're shipping earlier in the cycle, really doesn't generate a lot of margin.

What we're seeing now is movement towards what we call the budget category of merchandise.

And we have increased the [INAUDIBLE] really through all lines of the retail channels, mainstream distributors of retail outlets of games, as well as new avenues and grocery stores and places we've not seen, let's say, several years ago.

That end of the spectrum can range, you know, at 15 to 20% or better.

So without getting into, you know, a lot of specifics on a bright line number of what we would normally expect, I think we've moved well into the low double digits, and we're very pleased with that trend and we'll see where we go.

We think it will stay very strong for the next several quarters.

Jeff, can you just kind of give us an idea of what the state of retail is like now after we've seen the hardware price cuts?

Have we seen much of a pickup in demand, on either the hardware or software side, and given that it's summer, would you say this is kind of a normal summer, or is it a little bit better because of that?

Heath, I think it's a normal summer so far.

You know, I'm encouraged that retail is still fairly strong, but I view this as a normal summer.

Okay, thanks.

Thank you.

Our next question comes from Mr. Tony Gikas with U.S.

Bancorp Piper Jaffray, please state your question.

Good morning, guys.

Maybe just give us a quick run rate for the distribution business in terms of your expectations as a percentage of sales going forward, unless you said that in the last question, I might have missed it.

And then, what's been the margin improvement on the distribution business?

Could you characterize that for us a little bit?

I mean, is it 25 basis points, or is it 75 basis points?

And do you think that's sustainable over the next couple of years?

And then what's the quality of the inventory right now with the distribution business?

Okay, Tony, in no particular order.

If I recall the questions, the balance for the year in terms of the distribution, contribution, and revenue to our mix, we would expect to be in that sort of 35%, you know, pushing 40% range.

The summer is traditionally a little lighter for us by way of publishing and the distribution business continues to move right along.

With regard to the margin improvement, I think what I had mentioned was that in comparison, for instance, to our 1st quarter, our margins had doubled.

And that's much more than 25 or 50 basis points.

We've moved, as I mentioned, well into the low double digits, pushing mid double digits, and we'll have to see how that plays out over the next several quarters.

But we certainly expect to stay in that type of range.

If there was a third question -- the inventory quality, I mentioned that, you know, a very high percentage of our inventory in the neighborhood of 60%, 50, 60% is below $10 of, you know, per unit.

So we're very satisfied that we have a very diverse mix of inventory.

We keep a very watchful eye on it, we perform expensive tests with regard to aging and quantities on hand, which is necessary in this line of business.

How current would you characterize the inventory as being?

I would categorize this as very current.

We carry a wide assortment, and we're able to move into the marketplace when trends develop and, you know, given the size of our business, make very attractive purchases.

Okay.

Thanks.

Our next question comes from Mr. Shawn Milne with SoundView Technology Group.

Please state your question.

Thanks a lot.

Jeff, you talked a little bit about the initial product lineup for fiscal '04.

I guess it's my understanding that you'll hold back on guidance here until the next quarter.

Is that correct?

And maybe you can just think about that broadly for us.

Would you be looking to look outside the company to bring more revenue in to smooth that out a bit in fiscal '04?

I'd like to hear the thought process around that and I have one quick follow-up.

Thanks.

Yes, we will give guidance on the next call for 2004.

And a lot more color on the lineup.

We thought it was prudent to give a little bit of color now, especially on the Rockstar titles.

As far as bringing in revenue from outside the company, i.e. deals, we are constantly looking at deals.

There seems to be a great amount of deals to look at, probably more than any time that I've been in this business, and obviously if a deal -- we believe we can utilize our cash in a way that benefits the shareholders, we'll do a deal.

But we're not going to comment on specific deals we're looking at.

Okay.

And Karl, you talked about, I think I missed it in your prepared comments, about a benefit in G&A.

Can you just review that, please?

Sure.

Last year, as you may recall, we had incurred significant legal expenses with regard to restatements the company undertook, and we had submitted claims for reimbursement under our insurance policies and we received $800,000 in cash during the quarter, and we recorded that as an offset to the G&A line, which is where the original expenses had run through.

Okay.

So it's sort of a year-over-year timing issue?

Correct.

And with the receivable from an insurance company, it's just not really prudent, nor necessarily GAAP, to record that until you actually receive the cash.

Okay.

And lastly, I guess, I might as well ask it, you talked about a Rockstar game that was a game that was in development, another SKU for Xbox.

Is that GTA 3 for the Xbox, and when is that coming?

We said there would be an Xbox SKU from Rockstar in the 1st quarter of fiscal 2004, but we're not going to comment on what it is at this point.

Okay, thank you.

Thanks.

Our next question is from Edward Williams from Gerard Klauer Mattison.

Please state your question.

A couple of questions.

First of all, going to inventory for a moment, what are your goals for inventory levels as we progress through this year?

Ed, I would say, you know, we might see a little bit of a downturn in our inventory for the summertime, and then obviously, when we build into the holiday selling season, we do stock up on certain items.

So we've definitely permitted some increase in the distribution inventory throughout this first half of our year.

But we're very excited about the results.

I mean, the revenues basically doubled year-over-year, and the margins have effectively doubled.

And for a little extra inventory on the balance sheet, I think that's well worth the additional, if you will, cost of capital to cover that.

Okay.

And then if we look at distribution revenues, how would you break them down with regards to hardware, opportunistic buying software, and front line software?

I would say the super majority of what we're doing is on the opportunistic budget end of our business.

We are doing very little hardware at this point in the cycle It's just not really necessary for the distribution business at this point to carry that product.

And looking out for the year, how do you see gross margins on a blended basis?

Well, we came in with 37% this quarter, we were somewhat higher in the 1st quarter.

I would expect us to live comfortably within that range.

We may see a little uptick in the 3rd quarter, based on a little stronger lineup of PC product from Vice City.

But, you know, right around 40, 39% should be fairly safe.

Okay.

And then your head count in product development at this point?

And any games scheduled in the 3rd quarter or the 4th quarter that are on the cusp of the quarter end?

We're still at around -- approximately 450 people in our studios right now.

That may have increased a little bit with Frog City.

But, you know, 10, 20 people.

I can't think of any games other than Mafia which may be on the cusp.

And that's in the 4th quarter, not in the 3rd quarter.

Okay, thank you.

Thanks, Ed.

Our next question comes from Mr. Arvind Bhatia with Southwest Securities.

Please state your question.

Good morning, guys can you hear me?

Yeah, Arvind.

Hi.

I guess, as I do the math on the mix of publishing versus distribution and look at what that means for growth this year versus last year on the publishing side, I'm coming up with about 15 to 19% kind of range for the year.

One, is that consistent with your thinking this year?

And then second, I know you don't want to go into too much detail for next year, but would that be the sort of growth rate in the publishing business we could expect next year, as well?

And then I have a couple of follow ups.

Arvind, with regard to this year, we would see year-over-year growth of, you know, at least 15%, and I think we think that's a very significant achievement for the business this year coming off a very strong year last year.

And then Jeff, with regard to next year?

Arvind, I think we have 15% or plus growth in publishing, and 23, 24% overall, which is a significant achievement.

And as far as next year goes, we haven't given guidance yet, but I expect industry growth rates somewhere in the 10 to 15% range.

Okay.

And then regarding the Vice City product on PlayStation 2, can you tell us if you're resuming any contribution from that product in the 3rd quarter?

And then a question on Warriors, that game being pushed out in the 2nd quarter of next year, obviously the 1st quarter comparisons are the ones that are difficult.

At this point, should we then assume that -- or maybe just tell us more about what kind of quarterly mix are you thinking about, you know, from a revenue standpoint next year?

We may have to debundle that Arvind, but let's try to take them one at a time.

With regard to Vice, obviously, we've had continued sell through of that product in the 2nd quarter.

We see that continuing now into the 3rd quarter.

We've supplemented that with the release of the PC product, and that's attracted a fair amount of attention in that community, as well.

So we're very pleased with the performance of that product and we see it continuing on a very good path.

With regard to -- maybe you could debundle your question.

I know there was a comment about next year.

The Warriors question, we always said that The Warriors was in the first half of the year, as well as Max Payne.

I think this is the first time we've said Max Payne will likely be the in the 1st quarter and Warriors would be in the 2nd quarter.

So I don't think we've moved anything, Arvind.

Okay.

But what does that do to your quarterly mix of revenues next year?

Should we -- I mean, what kind of pattern, as we look at fiscal '03 and then we try to project fiscal '04, you know, can you talk about should we expect similar seasonality, product mix, you know, how you launch your products, et cetera.

Any kind of mix items you can provide?

Arvind, as always, you're on the leading edge of timely questions.

I think we can probably give you a little bit more color on the quarterly mix when we get around to the next conference call in a couple of months.

Suffice it to say, as Jeff mentioned, we think industry prospects are very good.

We're putting together here another very outstanding year for us.

We look forward to continuing our growth.

We'll have to get more into the specifics of that in about three months.

Okay.

Then just a quick question on Manhunt, if I could.

What sort of early buzz are you hearing on Manhunt, and what are the reactions that you've gotten so far from people who have seen some sort of a demo?

The early reaction has been very positive.

I mean, everybody's very curious as to what it is.

There was some announcement and there's a website up, but I think you'll have is to stay tuned for the brilliant marketing campaign that Rockstar will come out with in the next several months.

Okay.

And then final question is, how many million unit sellers or half million unit sellers do you think you've modeled for, either this year or next year, any kind of color regarding the big products?

Arvind, I think with the balance of the year, we have at least several products in the mix that are half million or better.

And then again, for next year, I think we should save that until we get a couple months down the path here.

Okay, great.

Thanks.

Thanks, Arvind.

Our next question comes from Bob DeLean at Morgan Keegan and Company.

Please state your question.

Hi guys.

My first question was about Q3 versus Q4 guidance for this year.

I don't think anything was broken out.

Maybe you can give us a little bit of help there.

Secondly, I had some questions on, you said you had 62 products in the development pipeline, but then there was 90 SKUs talked about broken down with between the three publishing labels.

I was a little bit confused there, maybe you could provide a little help on that issue also.

Bob with regard to earnings per share, we've increased our guidance.

We're at $2.28 now for the year.

We mentioned that we would expect to do 16 cents in the 3rd quarter.

Obviously, depending on where you put the share count and the amount of impact from stock option activity.

You know, you can work the math from the 57, 58 cent type range, but at this point, it would be a little bit too much crystal balling.

And with regard to the SKU counts, you know, what I mentioned was approximately 62 projects that we have in development, which we've capitalized on the balance sheet.

Jeff alluded to a number of 90 or more, which gets into a little further look, particularly with regard to some of our Gotham and Gathering titles, although there are some Rockstar coming further out in the time line, as well.

So I try to distinguish in terms of what we're carrying by way of capitalized dollars on the balance sheet and our prepaid royalty and cap software lines.

Jeff is really looking at the full pipeline, if you will, on all projects that we have on the drawing board.

With respect to those 62 that are currently in development or being capitalized, can you give us a breakout by platform on those?

They're typically not broken down platform.

I think suffice it to say, they're waiting there, I'm comfortable with.

At this point, we're not carrying anything in excess of $4 million on any given franchise.

When you look at a total balance between prepaid royalties and cap software combined of about 32 million, which, again, is down from balance.

It was averaging about 40 million in total last year.

We're pretty comfortable that our franchise concentration is, you know, very tolerable and manageable.

Okay, thank you.

Our next question comes from Mr. Stewart Halpern with RBC Capital Markets.

Please state your question.

Thanks.

First, I want to say that I actually didn't pay Arvind to ask that question that I usually ask about [INAUDIBLE].

We were wondering.

We were wondering about that, Stewart.

But let me just -- for elaboration on that.

Could you comment, you said several, you know, a half million or more, could you comment if embedded in the back half guidance you're expecting to ship a million plus units of any single product?

Stewart, I think at this point we've probably given about as much color as we choose to give.

I chose my words very carefully there, and we'll see how it pans out.

We've got very high hopes for the 4th quarter and an exciting lineup, pretty diverse product grouping, so we'll see how it goes.

Okay.

So, several half million plus doesn't necessarily imply any million plus?

I didn't say that.

I said --

It doesn't necessarily imply that, Stewart.

Yes.

If I have another 15 minutes, I'll think of more creative ways to try to pin you down.

But just a different point, would the Sony deal allow you to ship a non-PS2 GTA product, even if it's not the most current?

Stewart, as I said earlier, we're not going to comment any further on the terms of that deal.

Although, I believe by the next conference call, we'll be able to give some more color.

Okay.

Would the previous Sony deal have allowed that, as opposed to the amended deal, or the thing you just announced at E3?

The previous deal would not have allowed any other SKUs during the term of that previous deal.

Okay.

Thanks.

Thank you.

Our next question comes from Paul Kaump with Dougherty & Co. Please state your question.

Good morning.

With respect to the halo (phonetic) engine, can you guys give us an update?

Is that included in the 90 SKUs that you have in development right now?

Yeah, Paul, actually, at least one of those SKUs that we are looking to do and have actually done some work on, utilizes the halo engine.

Okay.

Is it going to be a Rockstar title?

Where is that coming from, and what would be the timing of that product?

It's a Gathering title, or titles.

There may be more than one.

Right now, I think there's one.

And I can't comment on the timing yet because it's in the very early stages.

Okay.

Next question: Duke Nukem Forever on the PC, any possibility under the sun that we see that this holiday season, or at what point, I mean, do you guys just pull the plug on that?

I think in terms of possibilities under the sun, you know, for this holiday season, the answer to that is, no.

The answer's, no.

With regard to next year, we're in a wait and see type mode at this point.

But last quarter we wrote it down substantially.

Right.

So we've generally already pulled the plug.

Right now we're just hopeful that the team in Dallas will finish it.

And as we've always said, and continue to say, they are sitting there working on this.

Very hopeful they will finish it.

Okay.

I think most of my other questions have been asked.

Thanks.

Thank you.

Our next question come from John Taylor with Arcadia Investment Corp.

Please state your question.

Hi.

I've got a couple of questions too.

Most of your comments about margin on the distribution side sound like they relate to gross margin.

Could you just confirm that?

And if that's true, then can you talk a little bit about what happened on the operating margin line, and maybe give us a sense of where that sits?

That's the first question.

Second is, The publishing mix , could you break that out between international and U.S. for us?

And Karl, I think on your prepared remarks, before you gave the revenue breakdown by product, you mentioned a number, I think I wrote down 63%, but I didn't hear what that was related to.

Can you repeat that for me?

Thanks.

John, with regard to the margin on the distribution business, the answer to that is, yes, we're referring to gross margins.

With regard to operating margins, I think we've also seen, you know, progress there with regard to the closure of the two facilities.

You know, we did shut our two warehouses back in January, and that was successful in providing some amount of cost savings.

With regard to, you know, the international mix of business, you know, for the business overall, we were approximately in 72% in North America and 28% international.

With regard to publishing, it was about a 64/40 mix with regard to domestic being 60%.

The 63% I'm not recalling quickly which number we hit that you were referring to, but maybe we can double back with you after the call and clarify that for you.

We certainly will have the transcripts and the tapes.

Right, okay.

And then to follow up on an earlier question, could you talk a little bit more about, you know, the impact of what you're calling the opportunistic buys as it relates to the overbuild of last fall, maybe, you know, what percentage of distribution revenue that made up?

I understand that you're still carrying some of that, which you expect to turn through, you know, what, maybe the rest of the year kind of thing?

But maybe just talk about that, kind of -- look at that as a nonrecurring opportunity, if you will, and, you know, unfold that a little bit more for us?

Yeah.

I mean, the -- I'm not really eager to get into a nonrecurring categorization of it.

I think Jack of All Games has been very successful by way of strategy in approaching a variety of vendors in the industry.

And I think what we also see somewhat going on in the industry is that smaller publishers who don't have the distribution reach are turning to us through this business to help them get their product placed.

And, you know, having the tandem business with the Take-Two and its brands, and the Jack of All Games and it's marketplace reached to 20,000 plus retail stores, we've seen that happen on a number of instances where people have approached us and asked us to help them distribute product.

That's a very important, I think, sign for us in terms of the future.

What we have seen clearly at the end of the holiday selling season was some amount of inventory difficult to quantify.

I wouldn't certainly say it was a majority, but it was a significant percentage of things we were able to buy at very attractive prices.

Now what we did not expect was that that would continue to somewhat, throughout this 2nd quarter.

Albeit, we don't see the same levels of excess inventory in the channel.

Thank you.

There are no further questions at this time.

Okay.

We appreciate you joining us and we look forward to our 3rd quarter call and talking to you then.

Thank you.

This concludes today's conference.

Thank you again for your participation.