Take-Two Interactive Software Inc (TTWO) 2003 Q3 法說會逐字稿

Welcome to the Take-Two Interactive third-quarter 2003 financial results conference call.

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

A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded.

It is now my pleasure to turn the call over to Ms. Cindy Buckwalter, Executive Vice President at Take-Two Interactive.

Good morning ladies and gentlemen.

Welcome to the conference call for Take-Two's third quarter 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 have not received a copy please call Ed Nebb 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 April 30, 2003.

Before we begin the call I would also like to 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 one-hour 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.

Good morning everyone and thanks for joining us.

Take-Two again posted record results in the third quarter resulting in the strongest balance sheet in the Company's history.

I'm sure you all saw the news today from Rockstar regarding the introduction of the Grand Theft Auto double packs for PS/2 and Xbox.

The Grand Theft Auto double packs, a bundling of Grand Theft Auto 3 and Vice City in one offering is a compelling product offering for consumers and resellers that will further extend the reach of our Grand Theft Auto franchise.

We also announced the acquisition of videogame publisher TDK and Mediactive, a leader in licensed product targeted for the children's and mass market audience, an area we believe provides additional growth opportunities for Take-Two.

We think there are various synergies between Take-Two and TDK which I will outline later in the call.

We feel confident in our ability to continue to achieve growth rates in excess of industry levels.

We have a strong product pipeline based on a combination of proven, wholly-owned intellectual properties, new brands and selective licensed properties combined with Jack of All Games position as the leading North American console distributor.

As a result we are providing initial guidance for fiscal 2004 showing 16 percent top and bottom-line growth.

I will now hand the call over to Karl Winters our CFO to discuss our financial results in more detail.

Then I will follow-up to provide additional information on our acquisition of TDK, product pipeline, growth expectations and industry outlook.

Good morning.

We are pleased with our operating results for the third quarter which were in line with guidance.

Net sales were $155.6 million an increase of 27 percent compared to $122.5 million a year ago.

Net income for the quarter was $7.7 million or 18 cents per share compared to net income of $4.8 million or 12 cents per share in the third quarter of 2002, a 50 percent increase.

In the third quarter the product mix in our publishing business continued to be more evenly balanced among our new products and catalog, which indicates the strengthening and diversification of our product portfolio.

Our top 10 products represented approximately 52 percent of total revenue for the quarter.

Three of the new products we shipped in Q3 proved to be meaningful contributors to the quarter's results.

Grand Theft Auto Vice City for PC contributed approximately 18 percent of revenue while Midnight Club 2 for Xbox represented about 7 percent of revenue and Midnight Club 2 for PC contributed 2 percent of revenue.

We also realized significant business for Midnight Club 2 for PlayStation 2 which we shipped late in the second quarter.

The title contributed about 8 percent of total revenue.

In the aggregate our wholly-owned and internally developed Midnight Club franchise contributed 17 percent of revenue for the quarter.

Grand Theft Auto Vice City for PlayStation 2 which launched last October also continued to generate strong sales, representing about 9 percent of the quarter's revenue.

Grand Theft Auto 3 for PlayStation 2 which launched in October 2001 and entered the Sony's greatest hits program during the third quarter generated approximately 3 percent of the quarter's revenue.

Our gross profit margin for the quarter was 39.6 percent compared to 37.2 percent in the third quarter of last year.

We are pleased with the gross margins for the quarter considering our sales mix which included a greater percentage of distribution business compared to Q3 last year.

For the quarter, our publishing business represented about 60 percent of total revenue, while distribution accounted for the remaining 40 percent.

Compared to 70 percent publishing, and 30 percent distribution in the third quarter of last year.

This business mix was in line with the guidance we provided last quarter when we said distribution would represent about 35 to 40 percent of total revenue in the back half of fiscal 2003.

With regard to our year-over-year gross margins two top-side observations should be made.

First, last year we realized a $2.2 million charge to product costs related to the settlement of litigation which lowered our gross margins.

Secondly, while this year's margin has a higher mix of distribution business, the distribution business is operating at a higher gross margin than last year.

Jack of All Games has continued to generate healthy margins by maximizing product mix and striking attractively priced deals, including several exclusive distribution arrangements.

We are pleased that our distribution gross margin was at about the same level we achieved in Q2 in the low teens.

Based on everything we've seen in the marketplace, we are confident that Jack's business will continue to be strong throughout the balance of this year and into 2004.

The platform mix in our publishing business was comparable to last year, about 59 percent of our publishing business was from console software, with about 40 percent from PC products and one percent from accessories and handheld products.

This compares to 60 percent console, 37 percent PC and 3 percent accessories and handheld products in last year's third quarter.

We are also pleased that our publishing business grew year-over-year during the third quarter by about 8 percent.

Moving to the individual components of cost of goods sold.

Our product costs 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.

Also our Grand Theft Auto products represented a smaller percentage of total revenue in our third quarter this year compared to last year, approximately 31 percent this year versus 48 percent last year.

Because our Grand Theft Auto franchise is internally developed and owned, these products generally have a higher margin than our other published products.

As I mentioned earlier Midnight Club 2 was a significant contributor to the quarter in terms of revenue, approximately 17 percent of total revenue.

Although the Midnight Club franchise is now internally developed and owned as a result of our purchase of Angel Studios in November, we are currently amortizing the intangible balance related to the acquisition, which flows through our product cost section of cost of goods sold.

Royalties decreased on both the dollar basis and as a percentage of revenues, due primarily to a $3.8 million write-down of prepaid royalties last year.

Our software development costs decreased on a dollar and percentage basis principally due to the fact that compared to last year a smaller percentage of our revenue for the current quarter was generated from product (technical difficulty) attributable to the products.

Our operating expenses were up quarter-over-quarter and increased slightly as a percentage of revenue.

I will walk through the line items to provide further detail.

Selling and marketing expenses came in about where we expected relative to our sales levels and were comparable to our percentage of revenue to our third quarter last year.

Our general administrative expenses increased on a dollar basis year-over-year but declined as a percentage of revenue.

G&A increased primarily due to compensation including some executive severance during the quarter.

I want to point out that during the quarter, we realized a credit to G&A of about 700,000 in total arising from approximately 300,000 insurance proceeds covering attorney's fees related to our restatements last year and about 400,000 from the favorable settlement of a lease termination related to the previously announced closing of one of our distribution facilities earlier this year.

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

Our R&D expenses also increased from the second quarter due to the acquisition of two small studios working under our Gathering label, Crime City (ph) and CatDaddy as well as a partnership with Destineer, a publisher of PC and Xbox products that Jeff will discuss later.

Our headcount in R&D has more than doubled from this time last year, to about 525 people currently, which is consistent with our strategy to bring more of our development in-house.

To briefly recap our nine-month operating results, revenue increased 32 percent to $758.6 million.

Gross profit margin was approximately 39.3 percent versus 36.8 percent last year.

Operating margins were about 16.2 percent versus 14.6 percent last year.

EPS of $1.72 for the first nine months represented a 36 improvement over the first nine months 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 $18 million in cash flow compared to operating cash flow of about 10 million in the third quarter of last year.

Year-to-date we have generated approximately 123 million in operating cash flow.

At the end of the quarter we had over 225 million in cash, as compared to nearly 74 million in cash this time last year and 108 million at year end.

Net accounts receivable at the end of the third quarter were approximately 66 million, compared to 100 million in receivables at the end of the second quarter and 107 million at year end.

Our DSO's were 38 days this quarter.

Our accounts receivable reserve currently stands at about 40 million, representing approximately 38 percent of gross receivables and about 11 percent of trailing six-month revenues and about 5 percent of trailing nine months revenue consistent with recent levels.

Inventories at the end of the quarter were approximately 74 million, down from about 77 million at the end of Q1 and the same level as the end of last year.

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

We are satisfied that our inventory levels are sufficient to support Jack of All Games growing 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 38 million collectively at the end of the third quarter representing about 65 products in development.

This number does not include TDK's product pipeline.

We expect to release about 17 additional products in the fourth quarter, including the Grand Theft Auto PlayStation 2 double pack and about 40 products in fiscal 2004.

Forty products break down as follows: 12 from Rockstar, 18 from Gathering and 10 from Gotham.

In addition to our 40 SKUs, TDK has approximately 20 mass-market SKUs planned for release in fiscal 2004.

To date we have not made any purchases under our stock buyback plan.

We continue to see business opportunities such as the TDK acquisition where we believe we can effectively utilize our cash resources to expand our product portfolio and ensure continued strong growth for the business.

Moving on to guidance, we are increasing our guidance for fiscal 2003 to 1.015 billion in net revenue and $2.30 in EPS.

We expect that our publishing business for the fourth quarter this year will be slightly up from our fourth quarter last year and that will represent about 60 to 65 percent of total revenue with distribution accounting for the balance.

Our guidance gives effect to the distribution agreement we signed with TDK for the fall/winter line-up.

We expect our fiscal 2003 publishing revenue to be up by about 20 percent over fiscal 2002.

Based on the back end weighting of our product release scheduled in the fourth quarter, we anticipate negative operating cash flow for the quarter.

We are also issuing initial guidance for fiscal 2004 of 1.18 billion in net revenue and $2.68 in earnings per share.

Our Q1 2004 initial guidance is 412 million in net revenue and $1.21 in earnings per share.

I would like to provide a bit more color on our guidance and the impact on our guidance from the acquisition of TDK.

We expect the acquisition of TDK to close in the first week of November.

For our fiscal 2004 guidance we have assumed that the acquisition of TDK will add approximately 35 million in additional revenue primarily related toward the back half of the year.

But we have assumed no material impact on our bottom line for next year.

This lack of bottom-line contribution for 2004 reflects our assumption that the gross margin contribution from TDK products will be substantially offset by amortization of the related acquired intangibles and TDK's operating expenses on a post-acquisition basis.

We will provide additional clarity going forward as to any possible change in our assumptions regarding the bottom-line impact once we have closed the acquisition and have had further opportunity to more closely examine their operations.

With regard to our consolidated 2004 guidance, we expect about 75 percent of our publishing revenue to come from sequels and extensions of proven brands as well as catalog products and about 25 percent of publishing revenue to come from new brands.

Within our new brand mix, we have assumed that four new franchises will contribute the majority of this revenue ranging by way of individual contribution from 2 to 8 percent each of publishing revenue.

We have assumed that nine of our franchises will have a sequel or an extension.

For instance, this includes the next installment of Grand Theft Auto and the release of Max Payne 2 on console.

For the purposes of our model these two games are each projected to contribute somewhat someone modestly in excess of 10 percent of total publishing revenue.

In total we would expect more than 50 percent of our publishing revenue from sequel releases and product extensions.

We believe that in fiscal 2004 our gross profit margins will be relatively comparable to those expected for this year.

We expect our operating expenses to range from just under 20 percent in high sales volume periods to just under 30 percent during the seasonally slowest months of the year, and average out in the low 20 percent range for the entire year.

Without our operating expenses, G&A expense should show minimal growth.

For sales and marketing we expect to support our current portfolio and invest in supporting new launches at levels modestly higher than fiscal 2003.

R&D expense will increase given our recent acquisition of Studios and the continued expansion of our staff.

Lastly, we expect our corporate tax rate to decline slightly to about 40 percent next year.

Although we are not currently providing 2004 quarterly guidance beyond the first quarter, we would expect the quarterly breakdown of fiscal 2004 to be roughly comparable to the relative breakdown we have experienced this year.

The only deviation we would expect at this point would be a higher percentage of our profits for the year coming in the fourth quarter of 2004, as we expect to launch the next version of Grand Theft Auto in that quarter.

Also we continue to expect our publishing business to represent about 60 to 65 percent of our revenue on both the quarterly and annual basis, with distribution accounting for the remaining 30 to 35 percent.

Jeff will provide some additional details shortly on the timing of our key product releases going forward to facilitate the buildout of your models.

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

Our revenue increased 27 percent, and we realized close to a $4.5 million increase in our operating income year-over-year.

Our efficiencies this quarter led to 150 basis point increase in operating margins to just under 8 percent.

We generated operating cash flow of approximately 18 million in the quarter and $123 million year-to-date.

We have over $225 million in cash and no debt, and we are predicting top and bottom-line growth of over 25 percent for fiscal 2003, with top and bottom-line growth rates of 16 percent in fiscal 2004 based on our initial guidance.

We look forward to speaking with you again in December when we report our fourth quarter and year-end results.

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

As Karl mentioned our publishing business was once again led by Rockstar AAA products.

Midnight Club 2 sales were very strong across all platforms, this proprietary franchise generated about 17 percent of the quarter's revenue.

The PC version of Vice City released in mid-July (technical difficulty) very high rankings from the PC gaming magazines was also a significant contributor.

Grand Theft Auto 3 and Grand Theft Auto: Vice City for PlayStation 2 continued to see strong demand.

We also realized a boost in sales in June when Grand Theft Auto 3 became a Sony greatest hits title.

All of these products have been top ten sellers during most of the quarter.

Gathering released the PC sequel Age of Wonders: Shadow Magic and Stronghold Warchest.

Gotham Games launched a new title, The Great Escape in North America on PlayStation 2, PC and Xbox and shipped Motocross Mania 2 and ATV Mania for the PlayStation.

In our distribution business, Jack of All Games continued to show strong growth, strong revenue growth and solid gross margins comparable to the low teens achieved in our second quarter.

As you will recall in the second quarter we realized the best margins in the history of our distribution business.

Jack's improved profitability has been achieved through a sharp focus on product mix and selective exclusive distribution arrangements.

We believe Jack is positioned for continued positive performance going forward.

Moving on to the news announced today.

We are excited about Rockstar's launch of the Grand Theft Auto 3 and Grand Theft Auto: Vice City double pack for Xbox and PlayStation 2.

The PS/2 double pack will be in stores in North America on October 22, and on November 4, for the Xbox.

The suggested retail price for the Xbox double pack will be 49.99 with a 39.99 MFRP for the PS/2 pack.

Grand Theft Auto is one of the most recognized franchises in the history of the videogame marketplace with sales of more than 25 million units worldwide.

Bringing this brand to the Xbox platform with an installed base of 8 million units worldwide further extends the reach of this blockbuster franchise.

We are confident that Xbox consumers will be delighted by the host of enhancements we have made to the Xbox versions of the Grand Theft Auto 3 and Grand Theft Auto: Vice City.

Such as (indiscernible) lighting, reflection mapping, higher polygon models as well as enhanced audio.

Consistent with our strategy to extend the Grand Theft Auto franchise, we also look forward to Capcom's highly anticipated release of Grand Theft Auto 3 on PlayStation 2 and PC in Japan in late September.

Amatsu (ph) a leading Japanese gaming publication currently ranks Grand Theft Auto 3 third on it's most wanted chart readers survey.

Now let me give you a little more insight into the TDK Mediactive acquisition.

TDK's management team brings industry experience in the area of licensed products for kids in the mass market, a large and expanding audience that Take-Two has only recently begun to explore.

TDK has grown rapidly through a strategy of identifying and securing licenses for video games based on well-known entertainment brands from popular major motion pictures, TV franchises and popular culture.

For example, they have licensed Shrek, Star Wars, Star Trek, Robotech, the Muppets and Pirates of the Caribbean, working with external developers to produce video games based on these properties.

TDK (indiscernible) excellent long-term relationships with the major entertainment companies like Disney, DreamWorks, Mattel, the Jim Henson Company and Classic Media, a key to success in the licensing business.

After the close of the deal the company will remain in Southern California keeping them close to the entertainment community.

There are significant synergies between Take-Two and TDK.

TDK provides Take-Two with the experience and proven relationships needed to secure strong license products, a different skill than that required for Take-Two's primary publishing business, the internal development of proprietary homegrown brand for cutting-edge product sold at AAA prices.

In turn Take-Two's proven expertise in the areas of product development, production, testing and marketing will be invaluable to TDK in the managing of the process of working with the external developers to produce and sell high quality midpriced games.

Also Jack of All Games extensive distribution capabilities provide extended reach for TDK's large and growing portfolio of mass-market and children's products.

We are also pleased with the interim deal we have arranged before the acquisition closes that has North American distribution rights to a variety of TDK's products, including TDK's multi platform release of the Haunted Mansion, a title debuting in mid-October in anticipation of the Thanksgiving weekend release of the Disney feature film starring Eddie Murphy.

Other near-term releases include Star Trek: Shattered Universe and Corvette.

We have also been impressed by many of the other TDK titles currently under development, including scaler (ph) being developed by Artificial Mind and Movement, a studio that has developed several successful licensed properties.

Also slated for next fall is the next generation of Robotech, Robotech Invasion, a sequel to TDK's successful Robotech Battle Cry.

Part of our strategy behind the acquisition of TDK reflects our desire to best leverage the current proliferation of retail price stratifications.

TDK is a platform to produce midpriced licensed titles which will be well-received especially at this point in the hardware cycle.

As the hardware cycle continues to progress there will be increasing consumer demand for products at a variety of price points.

While this does not impact the growth opportunity we have with our premium Rockstar products which will continue to be launched at higher price points, we clearly see benefits of selling product with mass-market appeal that are more attractively priced.

And by launching these mass-market products at lower initial price points we will also benefit from the tiered royalty rates offered by the hardware manufacturers.

TDK allows us to enter into the midpriced licensed product market with an experienced management team at the ideal point in the cycle for this type of business.

We also believe there will be significant opportunities at the 1999 and below price points, with our Jack of All Games subsidiary we have been able to do take advantage of many opportunities to purchase attractively priced software for mass markets for resale through Jack's customer base of over 25,000 retail store fronts.

This business has given us an inside look at the impact of pricing and how consumers respond to different price points for video games and has demonstrated the tremendous opportunity we have had to capitalize on this market.

Looking at properties we already have and how this will work, select titles like Starsky and Hutch and MTV's Celebrity Deathmatch will be the first titles benefiting from this pricing strategy.

These titles will hit store shelves at a retail price of 19.99 in the fall.

With the exception of the more premium products like the Haunted Mansion many of the products brought to market by TDK this year will also be priced at similar levels.

Take-Two's primary focus is on the cutting-edge games that gamers want to play, with Rockstar as our crown jewel.

We believe Take-Two has the best creative teams and strongest brands in the industry.

While some of our products will be at bargain and mid-tier levels, we expect the majority of our revenue to continue to be derived from Rockstar's AAA titles.

Similarly most of our (technical difficulty) coming from our Gathering label continue to command premium prices.

As we have mentioned on prior calls we are aggressively building our PC pipeline in order to capture the higher margins from this business and to help ease the transition into the next console hardware cycle.

Gathering has a number of interesting projects in development with a full slate of products scheduled for release in each quarter of fiscal 2004.

Releases next year include sequels and product extensions for successful brands like Hidden & Dangerous, Mafia and Viet Cong, and a variety of new products being developed by third parties.

Gathering has expanded it's product pipeline by partnering earlier this year with Destineer a small publisher of PC games.

Under the arrangement Destineer will develop 8 PC titles for Gathering, look for further details on these Gathering products in the upcoming months.

I want to emphasize that this is not a change of our strategy to focus on high-end original content with which Rockstar has had such great success.

It is rather an enhancement of that strategy to take advantage of the price stratification and the greater demand for mass-market gains, which are at this point in the hardware cycle and will continue through the end of the cycle well into the next cycle.

Now that I have given you some insight into our strategy and corporate objectives, I would like to spend some time reviewing our near-term product release schedule as there have been some movement of titles between the fourth and first quarters.

As we have said in the past, we have frequently moved titles between quarters for a variety of reasons including for financial development and/or competitive reasons.

We will surely do so (technical difficulty) The highlight of our fourth quarter release schedule include Rockstar's launch of the highly anticipated Max Payne 2, the fall of Max Payne for PC.

A sequel of the best selling franchise that has sold over 4 million units.

The game play store and line in (ph) graphics are all quite compelling and the consumer (indiscernible) consumer and retailer anticipation as well as early press has been very positive.

Several leading specialist gaming publications, for example Game Informer and Computer Gaming World did cover stories on this game in their September issue and the title received extremely positive previews in both cases.

The console versions of Max Payne 2 are planned for launch in Q1.

If you have not had a chance to do so already I would encourage you to go to Rockstar's Website to find out more about Max Payne 2, view the screen shots and read the previews.

In Q4 Rockstar will also be shipping the Grand Theft Auto double pack for the PlayStation in North America, with the Grand Theft Auto double pack for Xbox shipping in Q1 for North America.

Gathering is shipping Hidden & Dangerous 2, Railroad Tycoon 3 and Space Colony all for PC in Q4.

Mafia for PlayStation 2 and Xbox have been moved to Q1.

Gotham is launching MTV's Celebrity Death Match, Starsky and Hutch and Conflict Desert Storm 2 in Q4.

Also shipping in Q1 is Manhunt for PlayStation 2, a new brand from Rockstar North the developers of the blockbuster Grand Theft Auto franchise.

Manhunt has achieved critical acclaim with gaming press, with favorable cover stories in the September issues of both PSM magazine and PSE Pick.

Other Rockstar products planned for the balance of fiscal 2004 include the Q2 release of the Warrior, a new title based on the classic cult movies.

At least one Rockstar product in Q3 and the next version of Grand Theft Auto in Q4.

Just to provide a little perspective on the revenue stream for next year, as Karl mentioned, we expect the breakdown of our quarterly results throughout the year to be roughly proportional to what we experienced this year, with the exception of the fourth quarter when we could expect a higher contribution of profitability for the year due to the release of the next installment of Grand Theft Auto.

Also we anticipate our revenue mix to continue to hover in the 60 to 65 percent range for publishing, and the 30 to 35 percent for distribution.

Looking at our publishing business in a little more detail we expect about 75 percent of our publishing revenue next year to come from sequels and extensions of proven brands as well as catalog products.

About 25 percent of publishing revenue to come from new brands.

With the majority of our publishing business coming from proven brands and catalog products, the risk profile of our business model is much more balanced.

Now let me offer you a brief perspective on the industry.

First I will address hardware price cuts, we along with our peers had expected further hardware price cuts to occur by this time and certainly they would have provided a great shot in the arm for the industry.

However we continue to believe that even if price cuts don't happen this fall Sony will continue to utilize other selling strategies to achieve their year end sales target.

Second, we are encouraged by improved consumer confidence levels and the recent comments from major retailers about increased consumer spending.

We believe it bodes well for the videogame industry's holiday season and are particularly bullish about our prospects.

Finally there have been some buzz about the large number of titles planned for release in this holiday season.

While we can't speak for our competitors, we believe we are introducing a manageable number of new products and think we have taken a prudent approach in estimating our unit volume for each of these products.

To summarize, Take-Two remains excellently positioned in an industry where unique and compelling content is the key to success we have some of the best creative people in the industry and a proven track record of creating products that consumers want to buy.

Our strategy to broaden our product line through the addition of attractively priced mass marketed children's titles takes advantage of the large and growing installed base of hardware and provides for further diversification and better predictability of our business.

And with the year-to-date growth exceeding 30 percent in both revenue and earnings, significant cash reserves and a solid pipeline of products for the next 12 to 18 months, we are confident in our continued success.

Thank you for joining us today.

Before we take your questions I would like to announce that Jim Ankner has joined Take-Two as Director of Corporate Communications.

Jim has over eleven years of experience in investor relations, media relations and corporate communications, and has a solid understanding of the videogame industry from his recent consulting work for Electronic Boutique.

He will work closely with our senior management and division heads to solidify our corporate messaging, and generate additional media exposure for Take-Two.

Now we will be pleased to take your questions.

So that we may try and get as many people as possible we ask you to please limit your questions to just one or two.

Operator, we will be pleased to open the call to questions.

(OPERATOR INSTRUCTIONS) Heath Terry of Credit Suisse First Boston.

Just wondering if you could walk us through a little more detail on the TDK position in terms of what they bring as far as employees, both development and nondevelopment, how many studios are there?

What beyond the value line of product, what you are hoping to get out of the acquisition?

We have no internal studios, it is all external studios.

They currently have approximately 35 employees.

That will be somewhat less after the acquisition.

Most of the employees are in either marketing or product development or related services such as testing.

They have a fairly robust line of products currently in development.

I think Karl said approximately 20 SKUs.

Over the last several months, I think I said this on the last call, we hired a licensing person here who has been working very diligently on procuring licenses and stay tune for further announcements.

We plan to put some further licensed properties into TDK.

We have a good head start on that process.

The effect what TDK brings to us is that list of products that Jeff mentioned and while early on, I think we're trying to be prudent about what we expect out of the portfolio, we think it sets the stage for excellent continued growth at that end of the marketplace for us.

Stewart Halpern of RBC Capital Markets.

Thanks for the very detailed guidance.

That is really helpful.

On the TDK thing can you talk a little bit about TDK versus Gotham, are they going to both operate somewhat independently?

Are you going to continue the strategy that you had with Gotham or maybe if there's any clarification on how those two entities will work ongoing?

Secondly, we have seen on some retail websites Duke Nukem Forever has popped up again, any further updates there?

With regard to TDK and Gotham yes, we have two business groups at this point that are focused on very similar things.

Obviously we are interested in scale and leveraging that business.

We will probably have more to say in the future as we bring these two groups into alignment together and at this point it is a little early to get into specific details of that.

With regard to Duke Nukem, Jeff.

That is a good question on TDK Gotham, we have been giving a lot of thoughts to it.

Stay tuned.

On Duke Nukem to belabor the answer at least I had given the last two quarters when I was here, it is the same answer.

They are still working on the product diligently and we are hopeful they will complete it in 2004.

However, it is not in our guidance and to the extent we are comfortable and confident of a date when it will be completed, we will then announce and put it in our guidance.

Edward Williams of Harris Nesbitt Gerard.

Jeff just to belabor the point with TDK for a moment, could you comment about the Shrek agreement and what TDK should receive from the launch of the Shrek 2 game next spring?

I am at a little disadvantage here because I don't know what TDK has publicly announced.

I'm going to take a pass at this point and get back to you with what they have publicly announced.

There are further payments due to TDK from Activision and without having that public announcement information I want to leave it at that.

Anthony Gikas from US Bancorp Piper Jaffray.

Great job on the quarter.

A couple of questions for you, longer-term looking at the products release schedule how would you characterize the product breakdown by rating?

I mean at some point in time do you see your sales doing 25 or 30 percent of your products for the (indiscernible) category for the younger demographic?

Could you characterize the margins in the distribution business because I know you had indicated they were improving.

Are we hitting mid or upper teens in terms of gross margins with that business now?

Just working backwards with regards to the distribution margins, we mentioned they were in the low teens, that is about where they were in the second quarter and we see that holding, maybe improving a little bit into the future but we are very (inaudible).

The progress has been made there and we are excited about the future.

In regards to the longer-term product breakdown, I think the longer-term product breakdown is a hard question to answer, it can depend on where we are in the cycle and what opportunities we find ourselves taking advantage of.

Rockstar will clearly continue to develop and we will emphasize the edgy, original product.

Hopefully we can enhance it with products as in other markets such as license kits (ph), value priced products, etc. but I think it is too early to give percentages, it is too difficult.

But we clearly want to enhance our growth by entering into those markets.

Bob DeLean of Morgan Keegan.

I was hoping you could talk a little about the licensing agreement with Capcom, what is the economics in terms of the P&L impact of that relationship?

Bob, we have not given specifics but in general it was Capcom paid us in advance and they will pay us a royalty beyond the advance if they recoup the advance.

Other than that, we have not given specifics.

(OPERATOR INSTRUCTIONS) Jeff Vilensky of Bear Stearns.

On the exclusivity deal with Sony, in turn I assume there has been some window put on the next version of Grand Theft Auto for the PlayStation 2.

Can you comment on that?

On the Xbox GTA bundle, is that a pure 100 percent port?

Is there any difference from the PS/2 version for those two games?

Let me answer your questions in reverse.

There have been, I think I said in my prepared remarks, there have been several enhancements to the Xbox version, including a higher polygon model, enhanced audio, spectral lighting, reflection mapping.

The game will look better on Xbox with these enhancements.

So I think the Xbox player will be very happy with what they see.

It is not just a straight port.

With regard to the exclusivity, we basically did amend that deal; we think it will run long enough to cover the next installment of Grand Theft Auto substantially, and beyond that we're not really at liberty to say much more.

Arvind Bhatia of Southwest Securities.

My congratulations as well.

Quickly on this amendment with Sony, does that also allow you to do a GameCube product in the future?

Can you talk about the (technical difficulty) mix of publishing versus distribution and then finally on Grand Theft Auto: Vice City, I noticed on some of the retail websites you brought the price point down to $25 on the PS/2 version.

How does that impact the PC version?

Is there a thought about lowering that as well in light of the upcoming bundles?

As far as GTA Vice City pricing goes yes, we did bring down the retail price to 29.99 and we have not yet brought down the PC product.

It is still selling pretty well and there may come a time in the future depending on the relationship in sales among all of the GTA products where it will be prudent to reduce the price but not yet.

With regard to the first quarter expected distribution versus publishing mix, we will be safely in that sort of 65/35 relationship for publishing being 65.

The first question I believe you asked, will we ever bring GTA GameCube, we have no plans at this point to bring the product to GameCube, but it doesn't mean we won't do so in the future.

There is some period of time as Karl said where we will be exclusive on the next launch to PlayStation.

We are not giving out the length of that period for strategic reasons but at the end of that period we would be able to bring that product to other platforms, if it was financially prudent.

Shawn Milne of SoundView Technology Group.

Karl, could you just spend another minute or two on Jack of All Games?

This is the second or third quarter in a row where you have put up 70 percent growth this quarter, 90 percent growth last quarter.

Can you walk through really what is driving that?

I think coming out of the holiday you saw a lot of excess inventory in the market and that provided a lot of opportunity.

But what is really driving the growth continuing on in this quarter and going forward?

How are you keeping up those margins?

I think it is somewhat logical at this point in the cycle that there is a fairly extensive catalog of PlayStation 2 and we still successfully sell a lot of PlayStation 1 merchandise.

We tried to give some clues here in terms of the margins being in the low teens, we point out that the vast majority of our inventory does support the distribution business, that is about 85 percent.

About 50 percent of that inventory is carried in our price points, $10 and below.

And if you were to step up to the next threshold of about let's say $15, you would be covering something close to 90 percent of our inventory.

This is really a business that is focused on buying low, striking attractive in certain cases exclusive deals to anchor a portion of their sale catalog if you will, and then going and promoting it through these 25,000 retail point locations.

I'm sure it is not lost on you that you are finding this product in a lot more corner retail locations than just the mainline businesses.

That is where we are riding our success I think in particular.

The consumer demand given where we are in the marketplace, good selection of product that you can play off in terms of a distributor; and a very extensive sales effort and retail reach.

John Taylor of Arcadia Investment Corporation.

The arrangement with TDK, I am curious what impact that has on the Shrek rights, Accuvision has got Shrek 2, if there is a Shrek 3 is that up for grabs or do you guys have that?

Again, I am not sure what TDK has publicly announced in the past.

The original license agreement does provide rights for future movies.

And I'm going to again take a pass at that and get back to you if it has been previously disclosed.

Stewart Halpern of RBC Capital Market.

I just wanted to clarify, you talked about the fiscal '04 guidance being 1.2 billionish, and I think in your remarks you mentioned that the expectation would be that the next generation of Grand Theft Auto would perhaps be modestly over 10 percent of publishing revenue, just want to be sure I am doing my math right, on that 1.2 billion of guidance if we assume that publishing is about 65 percent of total revenues, that if we assume say 11 percent of that publishing revenue is GTA, at a $40 price point, that seems to suggest an assumption of only a couple million units or so for the next GTA generation.

And even if you assume a lower price point, sold barely 3 million units, is there anything wrong with my math there?

No, there's nothing wrong with your math.

We are being prudent in our unit assumptions as we always are.

We're not going to comment on specific unit assumptions.

We will let you do that.

We try to give some feel for the mix that is running through both the sequels, product extension catalog portion of our business versus the new brands.

And as I think we have been saying somewhat recently we are excited about '04 because it really does give us the opportunity to demonstrate how the portfolio is balanced and what the future holds for Rockstar and the other divisions of our business.

Heath Terry of Credit Suisse First Boston.

Can you talk a little bit about the (indiscernible) Max Payne coming out on PC soon?

Can you talk a little bit about the health of the PC business?

What you are doing there to kind of combat piracy for your games?

Because I think it is pretty apparent looking at the sell through on a game like Grand Theft Auto on a console and Grand Theft Auto on the PC that there is some business being lost there.

What can you do?

What are you doing?

You are absolutely right.

There is some piracy going on but we still think in Europe and North America, if you get the product out quickly and do a marketing blitz at the time you can capture a lot of sales without losing a lot to piracy.

Obviously in Asia it is a horrific problem that until the Asian companies develop solidified copyright and trademark laws, and unfortunately it will be a problem.

We don't see it as a material problem yet in the U.S. and Europe.

We are of course putting the latest and greatest copyright copy protection technology in our game, but of course always some hacker seems to be able to break those things as soon as some company comes up with the next one.

But we don't see it as a major problem yet.

As far as the general PC market goes, it is very polarized.

There are those that do and those that don't.

We feel that Max Payne has a very significant chance of being in the group that is successful.

Bob DeLean of Morgan Keegan.

Could you talk about your year-end hardware estimates for the installed base across the platforms?

And also talk about any plans you may have for the PlayStation portable?

With regards to the hardware installed base for the end of the year, Jeff you want to give your comments on where we think PlayStation and Xbox may land in terms of the trend with the price cuts comments you made earlier.

On PlayStation there has been lots of speculation as to whether or not Sony will get to the 10 million units, whether it needs to get to the 10 million units, whether it wants to get to the 10 million units.

I believe whether there is a price cut or not they will continue to do bundle deals to try and sell as much hardware as possible.

I think like many of you guys the analysts have said, to the extent they miss the $10 million number, it won't be by a significant amount.

You asked about PST, we have no plans yet but we are looking at the platform and determining what if any of our products would sell on that platform.

It is likely that we will sell some of our products on the PST.

There are no additional questions at this time.

Do you have any closing comments?

We thank you for joining us today.

If you have any follow-up questions, please direct them to Cindy Buckwalter.

Thank you and we look forward to speaking to you in the interim at our year-end call.

Thank you very much.

Thank you very much for participating in today's teleconference.

We would like to ask you to disconnect your lines at this time and have a wonderful day.