Take-Two Interactive Software Inc (TTWO) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Take-Two Interactive fiscal 2003 fourth-quarter and year-end conference call.

At this time, all participants are on 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 introduce your host, Ms. Cindi Buckwalter, Executive Vice President of Take-Two Interactive Software.

Good morning, ladies and gentlemen.

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 Amalee (ph) VanCleave at Euro RSCG Middleberg (ph) 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 on Form 10-Q for the quarter ended July 31, 2003.

Today's one-hour call will consist of a presentation by our management team followed by a question-and-answer period.

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

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

Thanks, Cindy.

Good morning and thank you for joining us today.

While there has been much speculation about the health of our industry, the fundamentals of the interactive entertainment industry remain strong and we are optimistic about Take-Two's prospects in 2004.

That being said, this holiday season has been somewhat lest robust than we anticipated.

We attribute this in part because of the (indiscernible) PS2, our Xbox price cut and the absence of a true blockbuster title like our Grand Theft Auto Vice City last year.

Let me briefly address our experience to date in the holiday season for each of our key titles.

We're pleased with the launch of the Grand Theft Auto Double Pack, with the Xbox version experiencing particularly strong sell--through.

The PS2 Double Pack has performed slightly less than we expected but we anticipate it to sell steadily in 2004, particularly after the expected PS2 price cut.

We expect the strength of the Xbox Double Pack to continue through the holiday season and into '04.

Our new brand, Manhunt for PlayStation 2, has met our expectations.

To refresh everyone on the guidance we gave on our last call, we expect new brands to contribute anywhere between 2 and 8 percent of our publishing revenues for fiscal 2004.

The Max Payne franchise is clearly a strong one, with the original Max Payne selling over three million units on three platforms.

With Max Payne 2, we acknowledge that sales have been slower than we might have hoped.

We continue to support the product with television, print, online and other forms of advertising, and we will closely monitor the progress of this title.

We will introduce the Grand Theft Auto Xbox Double Pack in Europe on January 2nd and expect to release Mafia for PlayStation and Xbox in late January.

We are continuing to see solid sell-through of our catalog of products, including our Greatest Hits and Platinum Hits titles.

Our distribution subsidiary, Jack of All Games, has benefited from the large (indiscernible) slate of holiday new releases as well as continued strong demand for budget products on both current and prior-generation platforms.

Jack has picked up new customers and has increased its business with existing customers partially through the expansion of its budget product portfolio.

Now, to summarize our record results for fiscal 2003 -- we passed the $1 billion revenue milestone and earned $100 million for the year.

We are especially pleased to report the positive comparison against last year's fourth quarter, given the record quarter we had last year with the release of Grand Theft Auto Vice City.

Our top titles in the fourth quarter were the new releases I discussed earlier, as well as Conflict Desert Storm II, Railroad Tycoon 3 and Hidden & Dangerous II.

We also realized strong sales from our catalog of products.

Midnight Club 2, released earlier this year, remained in our top 10 products for the quarter.

We are very pleased by the successful release by Capcom of Grand Theft Auto 3 on PlayStation 2 and PC in Japan in late September.

According to EnterBrain (ph), Grand Theft Auto 3 has sold approximately 300,000 copies to date in Japan, making it one of the most successful debuts for a western video game in Japan in 2003.

Our Jack of All Games business also had a very strong fourth quarter, with record levels of sales and improved profit margins compared to last year.

For the year, Jack's revenue was close to $362 million, a 60 percent increase over fiscal 2002.

Moving on to guidance -- as restated in our press release, we are reiterating our topline guidance for Q1 of 412 million but bringing down our earnings expectations from $1.21 per share to $1.10 per share.

There are several reasons for this change, in addition to the softness in the titles I discussed earlier.

We moved the release of Grand Theft Auto Vice City in Japan and other smaller titles, including Destruction Derby, from Q1 to Q2.

Our publishing distribution mix shifted towards distribution and we anticipate somewhat more expenses, particularly studio personnel expenses.

Finally, we have more shares outstanding than previously anticipated.

We are reiterating our full-year revenue guidance of 1.18 billion in net sales but lowering our 2004 earnings guidance slightly from $2.68 to $2.60.

We are issuing initial guidance of $218 million in net sales and 41 cents in earnings per share for our second quarter ending April 30th.

I would like to address the SEC disclosure we made today.

As you read in the press release, the Company has received a Wells (ph) Notice from the SEC.

We have initiated discussions with the SEC on the issues relating to the notice.

Other than what we've said in the press release, we cannot make any further comments nor answer any questions regarding the SEC investigation.

I'll 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 direction, growth expectations, product pipeline and industry outlook.

Thanks, Jeff, and good morning.

We're pleased with our operating results for the fourth quarter, which were in line with guidance.

Net sales were 278.5 million, an increase of 28 percent compared to 218.4 million a year ago.

Net income for the quarter was 26.6 million, or 59 cents per share, compared to net income of 22.3 million, or 54 cents per share, in the fourth quarter of 2002, an increase of 9 percent.

Our publishing business was 54 percent of our total revenue with distribution contributing the remaining 46 percent, compared to 72 percent publishing and 28 percent distribution in the fourth quarter of 2002.

Our publishing business was a bit lighter than we expected in the quarter, while our Jack of All Games business exceeded plan, achieving record sales for the quarter.

The product mix in our publishing business this quarter 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 39 percent of total revenue for the quarter, compared to 62 percent last year.

Max Payne 2 for PC, which launched in mid-October, contributed approximately 8 percent of revenue.

The Grand Theft Auto Double Pack for PlayStation 2, which was released in late October, represented about 7 percent of revenue.

The Grand Theft Auto Double Pack for Xbox was about 2 percent of revenue for the quarter, based on the initial shipments we made in late October to meet the North American street date of November 4th.

Conflict Desert Storm II for PlayStation 2 Xbox and PC, released in early October, represented approximately 5 percent in the aggregate of the quarter's revenue.

Railroad Tycoon 3 and Hidden & Dangerous II, both released for the PC in late October, each represented about 3 percent of sales for the quarter.

We also realized strong sales from our catalog titles, which represented approximately 40 percent of our Publishing business in Q4.

Our gross profit margin for the quarter was about 36 percent, compared to about 38 percent in the prior year.

The decreased margin was due to several factors.

First, as I mentioned earlier, the primary reason for the decreased margin was that our business mix with more heavily weighted towards distribution in the fourth quarter of this year compared to last year.

In addition, the percentage of revenue coming from our Grand Theft Auto franchise was significantly less in the fourth quarter of this year compared to last year.

Because Grand Theft Auto is an internally developed and owned franchise, products from this franchise generally have better margins.

We launched Grand Theft Auto Vice City for PlayStation 2 in North America in fourth quarter of last year, which alone generated about 28 percent of our 2002 fourth-quarter sales.

In the aggregate, our Grand Theft Auto franchise contribute approximately 41 percent of total revenue in Q4 last year, compared to 18 percent of revenue in Q4 of this year.

Moving on to the platform mix in our publishing business, in Q4 this year, our platform breakdown was about 60 percent console and 40 percent PC, while last year's fourth quarter was about 75 percent console software and approximate 25 percent PC products.

The greater contribution of PC products in the fourth quarter this year was offset by the fact that less of our publishing business this year was attributable to our higher origin Grand Theft Auto franchise.

Also, nearly 40 percent of our PC business in Q4 was for Max Payne 2 for PC.

Because we're amortizing the purchase price of the Max Payne intellectual property against sales of the product, the gross margins for this franchise are reduced.

Jack of All Games' revenue grew significantly in the fourth quarter.

Their revenue more than doubled in Q4, compared to Q4 last year, and their business has continued to generate healthy gross margins.

We're pleased that our distribution gross margin was about the same level we achieved in Q2 and Q3 -- that is in the low teens.

This compares to the single digit gross margins last year.

As a measure of the capital efficiency, the return on net assets in our distribution business is running in excess of 20 percent.

We do get quite a few your questions about Jack of All Games.

Since we expect distribution to continue to be a major contributor to our business model, I would like to add a bit more color on it.

We believe Jack's rapid growth has been fueled by a combination of factors.

First, the increase in installed base of hardware has naturally created increasing demand for software.

Over time, Jack has consistently broadened its product line so that it can now satisfy product demand for every platform, from consoles to handhelds.

Essentially, it carries software for every game platform except PCs.

They also have a very diverse selection of products across all platforms and carry significant amounts of inventory.

This allows them to better service their customers by expediting order processing and fulfillment and, in many cases, providing a one-stop shop.

As a result, they have captured greater market share from existing customers and have continued to sign up new customers.

They now service, for instance, the web site businesses for several of the major mass merchandisers, including Wal-Mart.com and .

Target.com.

Most importantly, they have developed particular expertise in servicing the value-priced segment of each platform, where there is a great deal of pricing flexibility and higher gross margins.

Jack has also been successful in striking exclusive distribution arrangements with various publishers.

Exclusive distribution deals contributed approximately 15 percent of distribution revenue in fiscal 2003.

Based on everything we've seen in the marketplace, we're confident that Jack's business will continue to be strong in 2004.

Moving onto the individual components of cost of goods sold -- our product costs increased in absolute dollars and as a percentage of revenue in Q4 because of the significantly higher percentage of distribution business in the quarter, which naturally carries higher product costs in our Publishing business.

Also, as I mentioned earlier, our higher margin Grand Theft Auto products represented a smaller percentage of total revenue in Q4 of this year, compared to last year -- approximately 18 percent this year versus 41 percent last year -- which also adversely impacted our gross margins in Q4.

Royalties decreased on both the dollar basis and as a percentage of publishing revenue Q4 due to a variety of factors.

Most significantly, external royalty payments decreased due to bringing certain products in the house, primarily as a result was of acquiring Angel studios in November of 2002.

In addition, last year in Q4, we wrote down approximately 5.8 million of prepaid royalties, compared to a write-down of about 2.9 million this year.

This was partially offset by higher amortization of prepaid royalties in Q4 this year because we shipped more externally developed products in Q4 compared to the fourth quarter last year.

Software development costs increased slightly on a dollar basis but remained about comparable as a percentage of Publishing revenue.

Our operating expenses increased on a dollar basis to support our significantly expanded business but were comparable as a percentage of revenue to last year's fourth quarter at about 20 percent.

R&D expenses increased significantly in Q4 compared to last year, due to several factors -- the acquisition of Angel Studios in November and Frog City and Cat Daddy this year, as well as additional general staffing in our development area.

Our headcount in R&D has increased over 80 percent from this time last year to about 570 people currently, which is consistent with our strategy to bring more of our development in the house.

Now, I will move onto the full year results.

Our operations resulted in net sales of 1.037 billion, more than a 30 percent increase over net sales of 795 million for fiscal 2002.

Earnings per share of $2.31 compares to $1.81 per share last year, an increase of 28 percent.

Our top 10 products represented about 51 percent of revenue for the year, compared to about 60 percent last year.

After our leading Grand Theft Auto franchise, our other top products for the year were primarily titles based on our proven brands, Max Payne, Midnight Club and Conflict - Desert Storm, the original titles and the sequels.

This clearly demonstrates our ability to develop successful brands and expand these franchises through sequels and product extensions.

We also realized strong sales for our catalog titles, which represented approximately 20 percent of our Publishing business for the year.

The Sony PlayStation 2 Greatest Hits program, which was introduced last year, has been a significant contributor to our Publishing operation.

Grand Theft Auto 3, Max Payne, State of Emergency and Conflict - Desert Storm I all entered the PlayStation 2 Greatest Hits program this year.

On the Xbox platform, Max Payne I and Conflict - Desert Storm I both entered the Platinum Hits program this year.

We now have a total of eight titles that are selling under the Greatest Hits and/or Platform Hits programs.

Our gross profit margin for the fiscal 2003 was 38.5 percent compared to 37.1 percent last year.

The higher margins were achieved with a greater percentage of distribution business this year.

Our Publishing business represented 65 percent of our revenue this year with distribution accounting for the remaining 35 percent, compared to 72 percent publishing and 28 percent 28 percent distribution in fiscal 2002.

The higher gross margins this year were primarily due to the improved profit margins in our distribution business.

In fiscal 2003, Jack of All Games gross margins averaged out in the low teens for the year, while Jack's gross margins were in the low single digits last year.

Our publishing platform mix year-over-year remained about the same.

In fiscal 2003, the platform mix for our Publishing business was about 81 percent from console software, 17 percent from PC products and 2 percent from accessories and handheld products, compared to about 84 percent console software, 14 percent from PC products and 2 percent from accessories and handheld products in 2002.

Total operating expenses increased on a dollar basis year-over-year to support our increased revenue and also increased slightly as a percentage of sales compared to last year.

General and administrative expenses decreased as a percentage of revenue but increased in absolute dollars from last year due to the growth of our business and expanded infrastructure to support current and expected growth.

Sales and Marketing expenses remained about the same as a percentage of revenue but increased in dollars from last year due to the higher level of advertising and promotional support we provided for our new product launches and catalog titles.

Our R&D expenses increased significantly year-over-year on both a dollar and percentage of revenue basis due to the acquisition of Angel Studios in November and Frog City and Cat Daddy earlier this year, as well as an additional general staffing increase in our development area.

Depreciation and Amortization expenses also increased significantly year-over-year due primarily to write-downs in conjunction with the consolidation of our domestic distribution facilities earlier this year.

We have also incurred additional D&A expenses related to the continual rollout of our J.D.

Edwards system in Europe and the purchase of related computer equipment.

As expected and as we indicated on our third-quarter conference call, we were cash flow negative in the fourth quarter.

Our cash flow used in operations was approximately $44 million, compared to cash provided from operations of about 26 million during the fourth quarter of last year.

Our cash flow deficit was primarily attributable to our product release schedule, which was significantly weighted towards the back half of the quarter, and the ramp up of distribution of inventory for the holiday selling season.

For the full year, we generated over $80 million in operating cash flow, compared to about 145 million in operating cash flow for fiscal 2002.

At the end of the fiscal year, we had about $183 million in cash with no borrowings under our lines of credit, as compared to 108 million in cash at the end of last year.

We would expect to be cash flow positive in this first quarter.

I'd like to review some of the other key balance sheet items.

Net Accounts Receivable at the end of the year were approximately 172 million, compared to 108 million in receivables at the end of last year.

Nearly 60 percent of the receivable balance was for our distribution business.

The year-end receivable balance was higher than last year due to our expanded volume of business and the large number of product launches in the final month of the quarter.

Our DSOs were 56 days in the fourth quarter, compared to 38 days in the third quarter and 45 days in the fourth quarter of last year.

Our DSO level reflects the timing of our product releases, as the majority of our fourth-quarter releases shipped in October, with several of them shipping in the last two weeks of the quarter.

Just to illustrate, 13 of the 18 SKUs launched in the fourth quarter were shipped in October and five of these SKUs shipped in the last two weeks of October.

Our DSOs, based on the month of October alone, were only about 29 days compared to about 24 days last October.

Our Accounts Receivable reserves stood at about 57 million at year-end, representing approximately 25 percent of total receivables and about 13 percent of trailing six months revenue and about 9 percent of trailing nine months revenue, consistent with recent levels.

Our AR reserve was 28 million at the end of fiscal 2002.

Inventories at the end of the quarter were approximately 102 million, up from about 74 million at the end of last year and the end of the third quarter.

Inventory levels at year-end represented the amounts required for our peak holiday selling season, which is showing meaningful growth year-over-year in the distribution area.

It is important to note that the significant majority -- about 80 percent -- of our inventory relates to our distribution business with about 45 percent of the distribution inventory consisting of products with cost of goods below $10 and about 75 percent of the distribution of inventory consisting of products with cost of goods below $14.99.

Just to give you a better idea of the composition of our distribution inventory, at year-end, approximately 34 percent of the inventory was PlayStation 2 products, 20 percent Game Boy products, 16 percent GameCube products, 15 percent Xbox products, 13 percent PlayStation I products and 2 percent of other.

This platform breakdown correlates pretty closely to the sales trends we have been seeing in Jack's business.

We are satisfied that our inventory levels are sufficient to support Jack's growing business.

On the Publishing side, the only product that represented more than 5 percent of Publishing inventory at year-end was the Grand Theft Auto Double Pack for the PlayStation 2, which was manufactured late in the quarter for the titles -- October 21st ship in North America and October 23rd ship date in Europe.

We would expect inventory levels to trend down by approximately 20 to 25 percent by the end of Q1 as we near the completion of the holiday selling season.

Turning now to our prepaid royalties and software development costs, our short and long-term prepaid royalties in capitalized software stood at about 36 million at the end of the year, comparable to our balance at the end of Q3, representing over 50 products in development.

We expect to ship approximately 30 of the products in development during fiscal 2004.

The remaining products in development are expected to ship in fiscal 2005 or later.

The $36 million balance does not include TDK's product pipeline, as we had not yet closed on TDK by our fiscal year-end.

TDK's portfolio include approximately 15 titles that are planned for release in fiscal 2004 under our Gathering and Global Star labels.

Prepaid and expenses and other current assets increased at the end of the year versus last year due principally to prepaid estimated U.S. income taxes and deposits for inventory.

I'd like to speak briefly about some of the other events that have occurred since we last spoke to you.

Earlier this month, we closed the acquisition of TDK Mediactive.

The terms of the deal were modified from the original agreement as a result of the elimination of the Shrek license.

There was some confusion about the changing deal terms, so I will walk you through the transaction.

The original deal required us to pay about $22.7 million for the company plus working capital advances.

Upon the termination of the Shrek license, the consideration was reduced by $5 million.

So at the closing of the deal, we paid 17.7 million, $5 million less than the original 22.7 plus working capital advances, which were 4.8 million, for a total of 22.5 million.

However, I should point out that at the closing, we owed TDK approximately $8 million under the terms of our distribution agreement.

This $8 million payable then eliminates that closing, so our net investment in TDK was reduced by that amount, leaving us with an economic investment in TDK of approximately 14.5 million at closing.

Moving onto guidance -- as Jeff discussed earlier, we are reiterating our net sales guidance for the first quarter of 412 million in net revenue but bringing down our earnings per share guidance from $1.21 to $1.10.

We're also reiterating our fiscal 2004 net sales guidance of 1.18 billion in net sales but reducing our EPS guidance from $2.68 to $2.60.

We're also providing initial guidance for the second quarter ending April 30th of 218 million in net revenue and 41 cents in EPS.

We continue to maintain our estimates for operating expense for fiscal 2004 from those we detailed on our third-quarter call, when we provided our initial fiscal 2004 guidance.

The only change we would note is that we expect our corporate tax rate to decline slightly below 40 percent in fiscal 2004.

Also, we continue to expect our Publishing business to represent about 60 to 65 percent of our revenue on both a quarterly and annual basis, with distribution accounting for the remaining 35 to 40 percent.

Of course, there may be some quarters where the business split trends slightly outside this range, which occurred, for instance, in the fourth quarter.

With regard to our consolidated 2004 guidance, as we said on our last call, we still 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 brands, we've assumed that four new brands will contribute the majority of this 25 percent of Publishing revenue, ranging by way of individual contribution from 2 to 8 percent of Publishing revenue.

Just to clarify, the 2 to 8 percent of Publishing revenue for any individual new brand represents the total revenue from that brand across all platforms, not a single SKU for the entire fiscal year.

Although we're not currently providing quarterly guidance beyond the first and second quarters, we expect the quarterly breakdown for fiscal 2004 to be roughly comparable to the relative breakdown we experienced in fiscal 2003.

The only deviation we would expect at this point would be a higher percentage of our profit 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.

In summary, we're pleased with our operating results for fiscal 2003 and our current financial position.

Our revenue increased 31 percent and we realized a $43 million increase in operating income year-over-year.

Our operating margin of 16 percent for fiscal 2003 is among the highest of our peer group.

We generated an operating cash flow of over $80 million in fiscal 2003.

We have no debt and had over 183 million in cash as of our fiscal year-end and we're projecting top and bottom line growth of 13 percent in fiscal 2004.

At this point, I'll turn the call back over to Jeff, who will review Take-Two's business for the quarter and year in more detail.

Thanks, Karl.

Before I talk more about our product pipeline and industry outlook, let me share with you some of the key enhancements we've made to the structure of our Publishing business.

Rockstar will continue to focus on premium-priced, groundbreaking entertainment, primarily internally developed.

Gathering, which has historically focused on PC titles with only a handful of consul products, will now serve as publisher of all non-Rockstar mid-priced and premium products on both PC and console.

Global Star, our value-based publishing label, which has previously focused primarily on publishing PC products, will now be focusing on both value-priced PC and console games, basically all the products that retail for $19.99 and below.

We have phased out Gotham Games as a publishing label.

Gotham's catalog of titles and TDK's licensed properties will be published by either Gathering or Global Star, depending on the price point of these products.

Our licensing strategy for Take-Two licensing, the former TDK, will be that licensed compelling brands at reasonable terms for all platforms.

Part of the strategy will be to explore brands for children in the mass market.

Although we don't intend to participate in the bidding process for high-profile, high-cost brands, if the terms were right, we would certainly consider any opportunity.

Jack of All Games will continue to focus as the leading North American distributor of console and handheld software with particular strength in the budget segment.

We will be consolidating our U.S. and Canadian distribution operations on an operational, not physical, basis with the entire distribution business reporting into Jack of All Games in Cincinnati.

We're very pleased with the accomplishments that Jack of All Games has made in the past year generating record growth and significantly improving profitability.

We believe the consolidation of the U.S. and Canadian distribution businesses will help us leverage the historical success that Jack Canada has had distributing budget software -- budget PC software.

To extend Jack's leadership position in the attractive budget segment of the industry, all of Global Star's products -- those which are 19.99 and less -- will be distributed and sold exclusively through Jack, as well as any Gathering products priced at $19.99 and below.

We have already started this process in Q4, where all of the Take-Two value-priced published products were distributed and sold through Jack, including Starsky & Hutch, MTV's Celebrity Deathmatch, Ford Racing 2 and Ford Truck Mania.

I'd like to briefly review some of the recent additions to our management team.

First, as announced in the press release, Trevor Drinkwater has joined Take-Two as Chief Operating Officer.

Trevor has over 15 years of senior management experience in sales and marketing.

Most recently, he was Senior Vice President of Sales at Warner Home Video, where he helped Warner leverage the growth of the global video business.

Trevor's experience and disciplined approach to sales, marketing and operations further enhance our skills in these areas and will facilitate improved information flow internally and provide enhanced coordination of our resources.

We've also hired a new Chief Information Officer, John Stern, who will lead our IT systems area.

John has worked with over 50 companies to provide advisory technology management and hands-on services.

Prior to joining Take-Two, John headed the global implementation of an IT system for a $30 billion manufacturing and distribution company.

John has been instrumental in spearheading the full-scale implementation and upgrade of Take-Two's IT system.

Matt Slack (ph) joined the Company in the last quarter as Chief Operating Officer of Jack of All Games.

Matt has over 17 years of financial -- (technical difficulty) -- operational management experience in the entertainment industry.

He comes to Jack from BMG Entertainment, most recently as Senior VP of Finance and Administration for Arista Records.

Matt has only been here for a couple of months but along with the entire Jack team has worked to make the distribution process more efficient.

Matt will be focused on continually enhancing Jack's processes, flexibility and cost efficiency.

On the financial side, Laney (ph) Goldstein joined Take-Two as Senior Vice President of Finance, and Jay Goldberg joined as VP of Internal Audit.

Laney (ph) is a CPA with over 13 years of financial and business experience, most recently with Nautica, as Vice President of Finance and Business Development.

Jay has over 17 years of business experience, including 13 years in internal audit.

Jay is a certified internal auditor and a certified financial services auditor.

With these management additions, we believe we are in a much stronger operational and financial position and prepared for the continued growth of our publishing and distribution business.

Now onto our 2004 products -- the second quarter's premier products from Rockstar Games will be the newly announced title Red Dead Revolver for PlayStation 2 and Xbox from Rockstar San Diego.

We also look forward to once again working with Capcom as our distribution partner for the March release of Grand Theft Auto Vice City on PlayStation 2 and PC in Japan.

We've moved the Warriors out to the third quarter.

Rockstar's most anticipated title for 2004, the next version of Grand Theft Auto from Rockstar North, will ship in the fourth quarter and debut exclusively on PlayStation 2.

In fiscal 2004, we also expect to launch Xbox and PC versions of Manhunt, as well as an extension of the Grand Theft Auto franchise for Game Boy Advance.

From our Gathering label, you can expect to see extensions of the successful franchises Hidden & Dangerous and VietCong, as well as the launch of several new brands, including Destruction Derby Arena and products from their distribution arrangement with (indiscernible) Publishing.

(LAUGHTER).

We will also release several products based on the RoboTech and Spy Vs.

Spy franchise from the TDK portfolio.

Global Star will release Corvette and USC (ph)- sudden impact.

Other Global Star products include original sports and racing titles like Motorcross Mania 3 and (indiscernible) Xbox online game, as well as franchise offerings like Virtual Pool and a new Army Men title for PlayStation 2 and Xbox.

Assuming a PS2 price cut in the first half of 2004, we anticipate software growth rates of about 10 percent in calendar 2004.

Take-Two will be at the forefront of publishing with a combination of AAA front-line titles, as well as numerous mass-market titles.

If on the distribution side, as the largest North American distributor of console software and hardware and a leadership position in budget products, we will continue to be opportunistic and even more efficient.

With our fiscal 2004 guidance reflecting expected revenue and EPS growth of 13 percent, 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.

Thank you for your time today.

Now, we will be pleased to take your questions.

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

Operator, will you please open the call to questions?

Thank you very much.

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

Heath Terry of Credit Suisse First Boston.

Can you talk about your plans for Red Dead Revolver and what you saw there that maybe Capcom didn't when they decided to cancel the product?

Can you also talk to us about what kind of data points or mileposts we should be looking for now that we're getting some information on the SEC issue around these Wells' notices and if there's anything, any more detail particularly as far as Ryan's response to this that you can provide?

As I said on the call, we really can't comment on the SEC investigation.

Frankly, all of this happened in the past several days and it's been moving very quickly.

As I said, we did initiate discussions and further than that, as to timeline or further data points, we really can't answer that question.

With respect to Red Dead Revolver, I can only relate my conversations or indirect conversations with the Rockstar guys, who are very excited about the title.

It is a Western title in line with the spaghetti westerns of years past.

I can tell you that both the Sam and Terry of Rockstar are very excited about the properties.

I can't tell you creatively what they saw in it that Capcom walked away from but they did see the opportunity to produce an excellent title and we look forward to good results from that title.

Maybe just one follow-up -- can you talk a little bit about the lessons or the kind of what kind of experience that Rockstar is taking away from Manhunt (sic)?

I think there's been a lot of discussion about Manhunt, but you know, so far as of said in my remarks, it's met our expectations.

You know, we've tried to say, on several occasions, that we did not project a heavy number of units for this product, and we are not displeased with the way it's selling.

Stewart Halpern of RBC Capital Markets.

I've actually got two questions, and then if I could follow-up just a little bit of clarification of the language in the press release.

The two questions are, first, do you still expect to be cash flow positive for fiscal '04?

Secondly, in your last call, you gave guidance relating to Max Payne and Grand Theft Auto as a percentage of total Publishing revenue for fiscal '04.

I'm curious if you've changed either of those.

With regard to cash flow, we indicated on the scripted discussion earlier that we expect to be certainly cash flow positive in the first quarter.

I would expect, for the balance of the year, given the growth in the business and the income contribution we are expecting, that it would also be cash flow positive for the entire year.

However, that's based on a preliminary book and the timing of when we get into Q4 shipments in individual quarters.

I respectfully request that we can hedge on that for the moment and will give more guidance on that as we go.

But the overall business -- you know, obviously, we are expecting significant -- we said 13 percent growth.

We would expect that our earnings have correlated we think quite well with cash flow from operations and we would expect to see that continue.

In relation to your question about expectations for Max Payne and the next Grand Theft Auto, yes, I mean, we still would feel that what we said in our prior call about the next Grand Theft Auto being modestly in excess of 10 percent of our fiscal '04 Publishing revenue still applies.

For Max Payne that would also apply -- but for the entire franchise (indiscernible) multiple SKUs that are out for Max Payne 2.

Just some clarification on the language in the press release -- you make reference that the guidance doesn't include any potential monetary penalties relating to the SEC stock.

Would you say, though, that the guidance dose assume legal costs associated with whatever level of activity is likely to be consistent with having received a Wells notice and prospective follow-up on that?

Obviously, spending on professional fees is something that can be variable over time.

I think, within the overall range and scope of our operating expenses, that we're comfortable that we've got fairly prudent numbers in this area but like anything else, as we've further addressed on the call earlier, this is a little bit of going into unknown territory and we will just have to see.

Also, in the language in the release, the SEC has also raised certain issues (inaudible) (indiscernible) AS-48.

Is that actually part of the Wells notice also, or is that sort of in addition or separate?

I think we're just trying to give you the best summary we know how in terms of (indiscernible) form and substance of the SEC statement of affairs are at this point in time.

I guess I'll take that almost as a no comment.

Tony Gikas of Piper Jaffray.

Good morning, guys.

Nothing specific to the investigation but Jeff, could you just clarify -- when specifically did you receive the Wells notice?

Secondly I would assume that the Company has adequate insurance for this type of a contingency.

Then one real quick follow-up.

I can't recall the date but it's the last several days.

This is all very recent, Tony.

As far as insurance goes, Tony, it's a little early to be talking about insurance and the exact nature of things like that.

You know, we will just have to see on that point.

Have there been any changes in management recently or potential changes?

I think Jeff has outlined the additions that we've made to the management team.

We really think, at this point, we've strengthened both at an executive level and sort of a more middle to senior tier, you know, financial and operational level -- the team necessary to carry on with the business and position us for growth.

You see no resignations?

We've had nothing to say with regard to resignations and we expect to proceed forward.

Edward Williams of Harris Nesbitt Gerard.

Just a couple of quick questions -- first of all, could you remind us as to what the key new brands are for 2004 that you highlighted for the 2 percent to 8 percent?

Also, I just wanted to look into the R&D budget in general.

Edward, I think what we've announced in terms of new brands would be the Warriors -- obviously one of those;

Manhunt was one of the new brands, and now Red Dead Revolver.

How about the timing for the fourth one?

We have not provided for any details on that, the three new brands that we have discussed.

Then looking at your R&D budget at this point, can you comment?

You had a large increase in headcount this year.

What are your plans with regards to headcount for R&D as the year progresses?

Have you begun any concept development for the next generation of (inaudible) platforms?

I think, with regard to headcount, we are opportunistic in this area.

Rockstar and the rest of the creative focus for the Company in the PC area, etc. is open to further additions in the staff.

We have plenty of things to work on.

However, as you know, hopefully blending that in and coming across the right teams and the right opportunities is not something we can do in a linear format, so we are satisfied that we have a good team in place.

We've grown it; we're managing it well and it is showing up in the pipeline of new products, even this year.

With regard to the second half of the question --.

We've had meetings with Microsoft and Sony and clearly, we're beginning to think about Next Generation platforms but we are waiting for additional information from both.

Mike Wallace of UBS.

A couple of questions -- first of all, I want to start with the SEC thing.

Just looking at the language in the release, where it talks about revenue recognition and how it deals with current financials as well as guidance, should I assume that this is not just dealing with what happened two years ago but also current industry practice for recognizing revenue with distribution?

I think the words we used in the release were very carefully chosen.

We're not making any industry references at this point in time.

I think what you summarized a moment ago is accurate in terms of the way we wrote it, (indiscernible).

As far as products, I think last call you referenced a couple new Rockstar titles that were unannounced.

Are those still in the plan this year?

Maybe you could give us an update on Duke Newcome?

Like in terms of the products, Red Dead Revolver is one of the new brands that was unannounced.

Some of the other products that we are not announcing, some of the additional SKUs for the platforms, for instance the Game Boy products, Manhunt for instance, PC and Xbox (indiscernible), so we have shed light on some of those in really kind of the key releases that we would expect from Rockstar.

And Duke Newcome?

As far as Duke Newcome goes, I had a recent conversation with the developer.

They are working diligently on the game and indicated to me that they expect to have the game completed sometime at the end of '04 or possibly the beginning of '05.

That's the latest word from the developer.

And it's clearly not in our guidance.

Just one more questioned, Jeff -- you mentioned 10 percent software growth and assuming a first half price cut -- are you assuming 149 or 129?

I'm assuming 129.

Arvind Bhatia of Southwest Securities.

Good morning, guys.

Again, just two seconds on the Wells notice -- is there any silver lining in all this that you can think of?

Then I have a couple of other questions related to your products as well.

One is on the next version of Grand Theft Auto.

You mentioned that you're still assuming more than 10 percent of your revenue coming from (indiscernible).

Are you talking about Publishing or total revenue?

Have you changed your unit assumptions at all on the next version of Grand Theft Auto?

I also wanted to understand the inventory situation -- (technical difficulty) -- Max Payne to where, Jeff, in your prepared remarks, you mentioned you acknowledge we are a little bit below plan.

What is the inventory situation with regard to Max Payne to the two SKUs that are out and also Manhunt as well for inventory?

That was a mouthful.

Taking it in the order that you went with, the SEC implied silver lining.

I think the only thing we could say further this morning is we are frequently asked this question over the last two years in terms of what's going on.

We've historically had very little to say and this morning, we have more to say.

Beyond that, we're not in the forecasting business and we can't predict the outcome of where this will lead.

I guess if we don't want to talk about wells notice, I understand but the past investigation -- is there any implication in which you have said this morning, with regard to the previous investigation, i.e. is that coming to an end?

Is that closing in any way, shape or form?

Have we made any progress in that?

That would be my question.

That was the silver lining I was, I guess, alluding to.

I think about the only thing we can say is that the process is moving along and we will have to see where it proceeds.

The process is moving.

We are in active discussions with the SEC and that's all we can say at this point.

I mean, at this point, is it fair to say you're closer to the end?

We can't give you any assurance of that today.

Just in response to your question regarding the next Grand Theft Auto, you know, again, we don't historically provide any unit assumptions but we have tried to guide to a rough parameter.

Again, we are still reiterating what we said on our last call, that we would expect the next Grand Theft Auto to be modestly in excess of 10 percent of Publishing revenue -- (multiple speakers) -- numbers we gave.

The 2 to 8 percent are all publishing revenue for '04 full year.

With regard to the Max Payne field inventory situation, I mean, we are obviously tracking the sell-through, the product (indiscernible) we think is performing well.

It may not be quite at the levels we would've desired sitting here several months ago but we are satisfied that we have the appropriate levels in the field and the product will continue to sell through.

Just a clarification on the tax rate -- you said, basically for fiscal '04, it's going to be less than 40 percent.

Can you be a little bit more specific, provide us maybe a range?

Is it 38, 39 percent or are we talking about less than that?

I think the range you've indicated is fairly close to where we would expect to be.

I think my further clarification on this point -- we took a very close look at the way our business was structured domestically versus internationally.

We've made some structural changes to that; those changes were put in-place and effected very late in the year, which is why we had a little bit of a (indiscernible) in the fourth quarter.

We would expect it structurally, therefore, to be more beneficial, going forward.

I guess your original 2.68, that guidance -- was that on the 40 percent tax rate or 38, 39 percent?

We had some indication that this benefit was coming; we just didn't articulate it all that clearly at that point in time.

John Taylor of Arcadia Investment Corporation.

I've got two questions, too.

Karl, you mentioned something about deposits on inventory on the balance sheet.

I wonder if you could clarify what that is.

That's the first question.

Then, when you look at Jack of All Games and the margin improvement you're seeing there, how much of the improvement is coming from improved resale margin?

In other words, better buying versus selling prices as opposed to Publishing products, Starsky & Hutch, ect., that you're putting through there and the positive impact that might have on mix?

The deposits and the prepaid expense (inaudible) current assets is where (indiscernible) call initial order, purchase order placement.

I don't want to get into too much of the strategic benefits that Jack ca derive, but we were put money down on an order in order to lock in a certain quantity of what we hope and would assume is very attractive price.

So that money, rather than be shown as true inventory, since we haven't physically received the goods, is shown instead as a prepaid and other current asset, in this case, more as a deposit than as you might classically think of a prepaid, okay?

Therefore, it fits within the overall category of prepaid and other current assets.

Let me just follow up on that, if I could?

So is it safe to assume that the price point breakdown you gave us on inventory at Jack's, the $9.99, 14.99, would apply to that?

I think that's fair.

Obviously, you're going to get into some levels -- specific identification of what the deposits are for but it's not necessarily out of line with what we do in the business overall.

With regard to Jack's margin, I think the overwhelming contribution to the business is just the sheer throughput of value-priced product.

I mean, this is why we drill on the average cost theme within the inventory in terms of our acquired prices with a larger majority at $14.99 or less.

We are clearly carrying a very dominant position, we think, in the marketplace for the value and orientation that consumers may be developing at this point in the cycle, and as they have in the previous cycles.

Jack historically comes up in terms of profit performance at this point since consumers have many choices and – (technical difficulty) -- people can buy things now in many different locations.

We are in over 25,000 discrete retail outlets.

This is no longer a stop and make a sophisticated buying purchase; this is something you can buy impulsively for a weekend.

So Jack is, I think, capitalizing on that and using the size and presence and skills in the marketplace.

It's sells principally to most of the same majors that we sell the publishing product to but it deals with many other smaller customers as well.

Can you give us a sense of what the publishing component is of Jack's revenues?

Our sheer Publishing truly Take-Two published product (indiscernible) Jack distribution results.

So Starsky and what-not that went through, that did go through Jack, though, didn't it?

We sell certain things through Jack but when we tally up the revenues, if it's a published label, we put in the publishing revenue.

Karen Ruscillio (ph) of Merrill Lynch.

Good morning.

I was wondering if you could give us kind of your thoughts on -- you know, you touched on the next version of PlayStation and Xbox.

You didn't touch on the PlayStation portable at all.

Have you talked to Sony about that?

Are you thinking about publishing titles for that platform?

Will that have a corresponding increase in R&D, going forward?

It won't have a material increase on R&D, going forward.

We do have a small group of people in one of our studios looking at it.

We're still debating internally which, if any, of our brands would be appropriate for PlayStation (indiscernible).

You know, as I said before, the leadtime on development will not be (indiscernible) it certainly won't be as significant as a full console development.

So, we're not going to be that far behind when we make the decision.

I think we'd like to get some actual color on how Sony is going to market this.

Do you have any initial thoughts on that?

No, we are waiting for some more color.

We've obviously had lots of conversations.

You know, if it's going to be marketed to a younger demographic, we will put less titles on it.

If it's going to be marketed to an older demographic, we would consider putting most of our titles on it.

We will take one more question, please.

Keith Gay (ph) of Thomas Weisel Partners.

A couple of questions -- is the reorg a streamlining-only or does it indicate any change in the branding positioning of the Company from a marketing standpoint?

Secondly, can you comment a little more on the opportunity you're seeing in Japan?

It looks like pretty good early traction on GTA 3 (ph).

Any targeted marketing efforts or product efforts that we should expect there?

I will answer your questions in reverse.

Japan is really a new market for us.

Although we've been there a bit in the past, Grand Theft Auto 3 did very well -- 300,000-plus units of a Western title in the Japanese market, under current conditions, we were very pleased.

So, because of that, I think we're paying a lot more attention to Japan with several of our properties.

There are discussions going on, which I'm not going to comment on, other than we have made a deal with Capcom for Vice City, which will come out in March -- originally scheduled for the first quarter and we decided to move it because Grand Theft Auto 3 had so much traction in Japan.

With respect to the brand, there is really not a lot of fundamental change in our philosophy.

You know, Rockstar, as I said, will continue to do the premier properties.

You know, we were then looking at Gathering and Gotham and we just decided to eliminate one of them to streamline the number of brands that we had and made Gathering -- the Gathering name kind of a catch-all for all the non-Rockstar, non-budget titles.

Global Star, we did strategically expand -- and we've talked about this in past calls -- that we were going to get heavily into this business.

It was primarily PC in the past; it's now publishing PC as well as console products.

All right, thank you very much.

We appreciate your participation in the call.

If there are further material events, we will certainly keep you informed.

Ladies and gentlemen, thank you for your participation.

This does conclude today's teleconference.

You may disconnect your lines at this time, and have a wonderful day.