Take-Two Interactive Software Inc (TTWO) 2004 Q2 法說會逐字稿

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  • Operator

  • Good morning, ladies and gentlemen and welcome to the Take-Two Interactive fiscal second quarter 2004 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.

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

  • As a reminder this conference is being recorded.

  • It is now my pleasure to introduce Miss Cindy Buckwalter, Executive Vice President of Take-Two Interactive Software.

  • Thank you, Miss Buckwalter, you may begin.

  • - Executive Vice President

  • Thank you.

  • Good morning, ladies and gentlemen.

  • Welcome to the conference call for Take-Two's second quarter fiscal 2004 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 visit the Investor Relations section of our Web site at www.taketwogames.com, or call Nicole at Euro RSCG Magnet at 212-367-6931 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, 2003, and in our Form 10-Q for the first quarter ended January 31, 2004.

  • 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 me today from Take-Two are Richard Roedel, our CEO, Paul Eibeler, our President and Karl Winters, our CFO.

  • At this time I'm pleased to introduce Rich Roedel.

  • Rich?

  • - Chairman, CEO

  • Thanks, Cindy.

  • Good morning and thank you for joining us today.

  • We have an awful lot to cover so I'll be brief.

  • As most of you have read in our release this morning revenue for the quarter was 153.4 million and we lost 33 cents a share.

  • Both top and bottom line numbers were below our expectation.

  • We also reduced our guidance for the third quarter to reflect lower than expected catalog product performance and the movement of several title launches out of the quarter.

  • We now expect revenue for the third quarter will be in the range of 130 to 140 million with a loss of 28 to 33 cents per share.

  • Revenue guidance for the fiscal year will be in the range of 1.125 billion to 1.145 billion, and earnings per share in the range of $1.60 to $1.65.

  • Our poor performance is due, in hindsight to an ambitious publishing schedule and also to a disappointing job selling our catalog products, especially our 2003 holiday releases.

  • I'll talk more about what we're doing to address our execution issues in a few moments.

  • First, though, I want to emphasize that we are enthusiastic about the industry's growth potential as well as our ability to get back on track and generate strong performance.

  • Take-Two is positioned to have the strongest holiday lineup ever.

  • Grand Theft Auto: San Andreas will be in the stores on October 19th in North America and on October 22 in Europe.

  • Initial indications of consumer demand for Grand Theft Auto: San Andreas, appear to be stronger than we originally expected.

  • Midnight Club 3: DUB Edition and The Warriors will also launch this holiday season.

  • Paul Eibeler, our President Gary Lewis, our Global Chief Operating Officer, Karl Winters, our Chief Financial Officer and I along with the rest of the management team are firmly committed to improving our performance.

  • After the recent alignment of our senior management team we have made several changes in key areas of our business.

  • Sales force.

  • We are realigning and consolidating our domestic sales department to improve efficiency and reduce cost.

  • In the area of compensation we are changing our compensation and incentive plans to hold management more accountable for meeting targets.

  • Recently we initiated a global comprehensive review of our compensation strategy using a well-known consulting firm to assist us.

  • In the area of publishing, in the short-term products that need more development time will get more development time.

  • But I want to stress our senior management team, as well as the entire company, have got to be held more accountable and will for setting and meeting ship dates.

  • In the area of operating costs, we are implementing an operating cost reduction plan with targeted savings of 10 to $15 million annually.

  • We are taking immediate steps to lower our operating costs and our corporate overhead.

  • Of course, based on where we are in our fiscal year which ends October, the full effect of these cost reductions will not be reflected in our financial results this year.

  • Improving our publishing and sales area and reducing our cost structure are the first steps, but not all that we can or will do.

  • Other steps we have taken include putting in place an experienced team of senior managers with extensive industry experience to plan and manage our entire publishing and development pipeline.

  • This team already made the decision to delay products and will continue to re-evaluate our release schedule for fiscal 2005 to ensure that Take-Two has a manageable number of titles and realistic release dates.

  • We will ensure product milestones are consistently achieved by setting realistic expectation for product launch dates that allow us to meet our high quality standards.

  • Gary Lewis, our Global Chief Operating Officer, is taking responsibility for forecasting our global business which resulted in resetting our expectations for the balance of this year.

  • Gary has taken a realistic look at where we are with future product expectations as well as reviewing how our catalog is performing.

  • Gary has had strong performance in our international operations and we expect the same level of attention to detail and consistency from him in the future.

  • I am highly confident in our abilities to overcome our immediate challenges and return to solid performance.

  • Take-Two is an exceptional company with tremendous short and long-term opportunities including our strongest holiday lineup in our history with Grand Theft Auto: San Andreas, Midnight Club 3: DUB Edition, and The Warriors.

  • We have strengths on every side of this business from an extremely rich portfolio of proprietary brands and a compelling product pipeline to the reach of our Jack of All Games distribution business.

  • And today we announced our partnership with SEGA Corporation to co-publish and exclusively distribute on a worldwide basis all SEGA sports properties.

  • The ESPN sports line is an incredible opportunity for us that fits nicely into our sweet spot and rounds out and diversifies our product portfolio.

  • Paul Eibeler will discuss the deal and our competitive strategy with this new product line in more detail later.

  • Before turning the call over to Karl, I would like to say that I am honored that the board of directors has asked me to be CEO.

  • To reiterate, my immediate mandate, along with the rest of the senior management team, is to ensure that we do a better job of managing our future growth, especially setting financial and strategic objectives that can be consistently met.

  • Karl will now discuss our second quarter financial results in more detail.

  • - CFO

  • Thanks, Rich, and good morning.

  • Net sales in the second quarter were 153.4 million compared to 193 million a year ago.

  • Net loss for the quarter was 14.6 million or 33 cents per share compared to net income of 14.6 million or 35 cents per share in the second quarter 2003.

  • Before we analyze our year-over-year results let's compare our results versus the guidance we issued in mid-April.

  • We expected revenue of 170 million and a net loss per share of 15 cents.

  • The reasons for our miss relative to guidance are related to the following, in descending order: lower than expected domestic publishing sales performance particularly in the back half of April, lower than expected domestic unit sales on products that have been significant contributors to our catalog business in the past and our distribution business missed its sales target.

  • Having said this, Rich has elaborated on the plans we have made to address these execution issues and the revised guidance we have provided today takes into account the lessons we have learned this year.

  • Turning now to our year-over-year results.

  • The primary reason for the decrease in revenue and earnings year-over-year is that in Q2 last year our top five publishing titles contributed 44% of revenue while this year our top five titles contributed 30%.

  • For Q2 our publishing business was 58% of total revenue with distribution contributing the remaining 42% compared to 65% publishing and 35% distribution in the second quarter of 2003.

  • Leading our publishing business this quarter was Mafia.

  • The PlayStation 2 title which shipped at the end of Q1 represented approximately 9% of total Q2 revenue while the Xbox title represented about 7% of revenue.

  • Manhunt for Xbox was about 5% of revenue.

  • The Grand Theft Auto double pack continued to be a strong performer with the Xbox double pack generating about 6% of revenue and the PlayStation 2 double pack about 3% of revenue for the quarter and our stand-alone Grand Theft Auto PlayStation 2 products were also meaningful with Vice City contributing about 4% of revenue and Grand Theft Auto 3 contributing 2%.

  • Red Dead Revolver for PlayStation 2 and Xbox was about 2% of revenue in the aggregate for the quarter based on the initial shipments we made in late April to meet the North American street date of May 1st.

  • Our platform mix differed considerably from last year.

  • We had significantly more console business this year.

  • In Q2 this year our platform breakdown was about 90% console software, 5% hand-held, 1% for PC and 4% for accessories while last year's second quarter was 83% console, 14% PC, 1% hand-held and 2% accessories.

  • Turning now to our distribution business.

  • We are pleased that our distribution gross margin has remained in the low teens continuing the levels we have realized since early in fiscal 2003.

  • We anticipate growth for Jack this year as a result of the recent hardware price cuts by Microsoft and Sony as well as the strong slate of new software releases coming from Take-Two and other publishers this holiday season.

  • To help prepare for the growth we're experiencing now and anticipate continuing into 2005 we look forward to moving into our expanded warehouse facility later this year.

  • Our gross profit margin for the quarter was about 22% compared to about 37% last year.

  • The primary reason for the decreased margin related to our business mix starting with a higher percentage of distribution business this year relative to total revenue.

  • In addition, the percentage of publishing revenue coming from our own internally developed Grand Theft Auto franchise was significantly less in the second quarter of this year compared to last year.

  • Approximately 17% this year versus 26% last year, which also adversely impacted our gross margins in Q2.

  • Royalties decreased on both a dollar basis and as a percentage of publishing revenue.

  • This is primarily because our internal royalty payments were higher last year compared to this year due to the larger volume of publishing sales last year.

  • Software development cost decreased in dollars and as a percentage of publishing revenue due primarily to the reduced level of publishing revenue this quarter.

  • In addition with the shipment of Midnight Club 2 in last year's second quarter, a significant amount of internal development costs related to that product were amortized in that quarter.

  • Our operating expenses increased in dollars and as a percentage of revenue compared to last year.

  • Sales and marketing expenses were comparable in dollars but increased as a percentage of revenue as we attempted to improve catalog sales.

  • General and administrative expenses increased in both dollars and as a percentage of revenue from last year.

  • Our G&A expenses have increased in the past year as we've expanded our operational infrastructure but were comparable to levels we incurred in Q1 this year.

  • However there were some unusual items that flowed through G&A this quarter.

  • We incurred about approximately 3 million of expenses for severance charges, signing bonuses and restricted stock compensation which were partially offset by approximately 1.5 million in benefits in two areas: Insurance proceeds covering professional fees and the sale of a European warehouse.

  • In last year's second quarter we realized a credit to G&A of about 800,000 also from insurance for professional fees.

  • We expect to see the benefits of our cost reduction plan later this year and reduce G&A levels.

  • R&D expenses increased in dollars and as a percentage of revenue compared to last year due to several factors: The acquisitions of Frog City and Cat Daddy last year and Mobius Entertainment and TDK this year as well as additional general staffing in our development area.

  • Our headcount in R&D has increased close to 40% from April last year to about 640 people currently.

  • Moving on to our tax position.

  • On our last two conference calls we said we had implemented a new tax structure for our worldwide operations that would result in a reduced tax rate of 37% going forward compared to our historic 40% plus rate.

  • After doing more work on this area we've actually reduced our tax rate down to 36% which you will see reflected in our six-month results.

  • As a result of this improvement we effectively realized about a penny per share benefit this quarter.

  • Our cash flow for the quarter was approximately 10 million compared to about 23 million in the second quarter of last year.

  • At the end of the second quarter, we had about 261 million in cash compared to 188 million in cash last year.

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

  • Net accounts receivable at the end of the second quarter were approximately 69 million compared to 167 million in receivables at our year-end.

  • Approximately 88% of the receivable balance was for our distribution business.

  • Our DSOs were 40 days compared to 54 days in the fourth quarter and 46 days in the second quarter of last year.

  • Our accounts receivable reserve stood at about 64 million at the end of the quarter representing approximately 48% of gross receivables.

  • Our reserves are approximately 12% of trailing six-months revenue and about 8% of trailing nine months revenue similar to last month's levels.

  • Inventories at the end of the quarter were approximately 100 million down from about 111 million last quarter but about flat compared to our year-end.

  • About 60% relates to our distribution business with about 40% of our domestic distribution inventory consisting of products with cost of goods below $10 and about 85% of the distribution inventory consisting of products with cost below $14.99.

  • We will continue to monitor inventory levels very closely over the coming months.

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

  • Our short and long-term prepaid royalties and capitalized software stood at about 51 million at the end of the quarter.

  • Roughly a $14 million increase compared to our year-end balance representing over 65 products in development.

  • Our software balances generally increase at this time of year as we are working on a variety of products to be shipped over the holiday season.

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

  • Our SKU count is trending higher than it has historically due to Global Star's strategy of publishing value priced titles.

  • Moving on to guidance.

  • As Rich mentioned earlier we are reducing our fiscal 2004 guidance to net sales in the range of 1.125 billion to 1.145 billion and EPS in the range of $1.60 to $1.65 per share and are reducing our third quarter guidance to a range of 130 to 140 million in net sales and a net loss per share of 28 to 33 cents, primarily to reflect the following: Continued lower sales of our catalog products, the shift of several products from third to the fourth quarter, and the shift of a significant Gathering product out of the fourth quarter and into next year.

  • This reduction in publishing income is being offset to some extent by an operating cost reduction plan we've begun implementing.

  • Also, it is important to note that the guidance we have provided today for fiscal 2004 does not include any impact from the agreement we just announced with SEGA of Japan to co-publish and distribute the ESPN sports titles.

  • In terms of our business mix, in the last few quarters our distribution business has been a significant contributor to our overall business.

  • And as we said earlier, our publishing business has been underperforming this year.

  • As a result you can expect to see our distribution business move up a bit to about 45 to 50% of revenue in the third quarter, and then trend back down in Q4 to about 25 to 30% of our business with the release of Grand Theft Auto: San Andreas.

  • In our last call we said we expected Grand Theft Auto: San Andreas to contribute approximately 15% of our 2004 publishing revenue.

  • With early indications of high consumer and retail demand for Grand Theft Auto: San Andreas we have increased our expectations for this title.

  • We continue to assume that the new brands we've introduced this year such as Manhunt and Red Dead Revolver will represent no more than 8% of publishing revenue for the year across the entire franchise.

  • At this point I will turn the call over to Paul to cover our product lineup and additional corporate developments.

  • Paul?

  • - President

  • Thanks, Karl.

  • First, on behalf of the board of directors, I want to express our confidence in Rich Roedel and his acceptance as Take-Two's Chairman and Chief Executive Officer.

  • Rich has worked closely with Take-Two for the past 18 months as a board member.

  • First as chairman of our audit committee and later as our non-executive chairman.

  • Rich brings stability, a strong financial background and complimentary management skills to our organization.

  • The board of directors has concluded that the best course of action was to name Rich as CEO.

  • I personally have worked very closely with Rich and feel he has the right skills, the right management style and the right experience to help move the Take-Two organization to the next level.

  • Today, Take-Two represents a financially strong company with a tremendous opportunity.

  • Admittedly, the past year has been very difficult but we are making changes and putting our resources and management team in place to improve our performance.

  • Let's start with a review of Q2.

  • In late April we shipped initial quantities of Red Dead Revolver.

  • Retail and consumer feedback has been positive to this new wholly owned internally developed product.

  • Our new brand, Red Dead Revolver, represents a new genre as we continue to create exciting products.

  • Also from Rockstar we shipped the Xbox and PC versions of Manhunt, further extending this new internally developed product.

  • Manhunt has been a steady performer meeting our sales goals for a new brand.

  • Rockstar also shipped the international version of Max Payne for the GBA.

  • Our Gathering label shipped Mafia for PlayStation 2 to the international market and shipped the Xbox version worldwide during Q2.

  • Gathering also shipped Destruction Derby Arenas in North America for PlayStation 2.

  • This game features full online capability.

  • Global Stars' Corvette for PlayStation 2, another multiplayer, online enabled game has sold well ranking 12th on MPD April sales charts.

  • Global Star also shipped Serious Sam: Next Encounter for PlayStation 2 and GameCube and Serious Sam Advance for GBA and Carve for Xbox.

  • Ultimate Fighting Championships' Sudden Impact shipped for PlayStation 2.

  • Also in the second quarter Global Star shipped Virtual Pool 3, the PC, Dr. Seuss: Cat In the Hat and a Disney compilation product was shipped for PlayStation 1.

  • Moving to the third quarter.

  • In late May Cap Com in Japan shipped the localized version of Grand Theft Auto Vice City for PlayStation 2 and PC.

  • Early reports indicate that Vice City will be one of the most successful launches for a western title in Japan.

  • We are incredibly pleased with the success that we continue to have with the Grand Theft Auto franchise worldwide.

  • Looking at Q3 Red Dead Revolver was our principal release as we completed the North American launch quantity shipments and subsequent reorders.

  • The product will ship in Europe this week.

  • International sales also included the loss of Dragon Guard for PlayStation 2.

  • Our Q4 highlights include the launch of Grand Theft Auto: San Andreas.

  • It is fair to say that San Andreas is the most anticipated holiday title for this holiday season.

  • For those of you who weren't at this year's E3, the June issue of Game Informer features a cover, a 10-page article and screen shots previewing this product.

  • This is the first of many covers planned right up to the release of this game.

  • I'd like to quote the Game Informer editor who wrote that when compared to other franchises, quote, it becomes clear that the Rockstar group has no plans to step down from its position as one of the most daring and successful companies in video games, end of quote.

  • The fourth quarter also brings Grand Theft Auto to GBA.

  • From the Gathering label, Vietcong, Purple Haze, a narrative-based first person [inaudible] for both PlayStation 2 and Xbox was moved to early Q4.

  • Robotech: Invasion, based on the successful toyline and Conflict: Vietnam an extension of our Conflict series from Pivitol Games will ship for PlayStation 2 Xbox and PC.

  • First to Fight from Destineer is a marine combat game for Xbox and PC.

  • Rounding out our PC products is the sequel Kohn II: King of Wars.

  • Our Global Star publishing label will ship Outlaw Golf for Play Station 2 and Xbox, Scaler, for PlayStation 2, Xbox, and GameCube, and Sentinel Crisis for PlayStation 2.

  • For the GBA market we will ship Dora the Explorer and Cartoon Network's Codename: Kids Next Door.

  • And as previously announced we're planning to ship Midnight Club 3: DUB Edition in time for the holiday season based on the successful Midnight Club franchise with sales of over three million units.

  • With Dove Magazine acting as the creative consultants Rockstar has injected their expertise into the technical evolution of nonlinear racing.

  • DUB is the leading automotive trend magazine.

  • In April the "New York Times" called DUB the Bible of urban automotive subculture.

  • The exclusive partnership with DUB is a major coup for Rockstar and further differentiates this product in the marketplace.

  • Also planned for the holiday season we will ship our highly anticipated Warriors product.

  • There is a high degree of buzz among the gaming audience for this title.

  • Now to address our opportunity with SEGA and the ESPN sports games.

  • We will apply our distribution resources to the SEGA sports properties which include NFL Football, NHL Hockey, NBA Basketball, College Hoops, and Major League Baseball under the ESPN license, all for PlayStation 2 and Xbox.

  • The established sports developer Visual Concepts will continue to develop and market these titles.

  • The product will be co-published under SEGA Global Star Software label and will be distributed exclusively worldwide through Jack of All Games and Take-Two Europe.

  • Our strategy starts with the best product in the market as evidenced by the stellar reviews and previews in the gaming publications.

  • In fact, we are off to a great start.

  • Game Spot awarded ESPN NFL Football as the best sports game at the recent E3.

  • All products will be supported under the ESPN license with a multimillion dollar marketing campaign including TV and print.

  • The last component is our plans for value pricing which we believe will further differentiate our products in the marketplace.

  • I'd also like to note that both Sony and Microsoft are not publishing sports titles this holiday season.

  • At this point in the hardware cycle with our emphasis on the mass market and all the factors I've discussed we are confident we can make inroads into the lucrative sports segment of the business.

  • As we review our Jack of All Games business we remain optimistic about this important part of our revenue model.

  • This business directly benefits from the hardware price drop with increased demand for budget and value product.

  • Retailers have increased confidence in Jack of All Games' ability to offer value-added programs to fit their needs.

  • The portable market represents a growing opportunity for Take-Two.

  • The recent formation of Rockstar Leeds after the acquisition of Mobius Entertainment, a leading independent handheld developer, shows our commitment to this business.

  • We are presently working on two titles for the PSP.

  • In the past year we have increased our offerings for the Nintendo GBA with product extensions like Dora the Explorer, Serious Sam and Max Payne.

  • We look further to extending our product line to the Nintendo DS.

  • This first call since my return to Take-Two is a difficult one for me.

  • Although the results are disappointing I remain confident in the future.

  • We are fortunate to have solid strength and a powerful pipeline of product combined with a growing interactive market.

  • I speak on behalf of all management at Take-Two that we are deeply committed to doing everything possible to put this company back on a path to profitable growth.

  • Now we'll be pleased to take your questions.

  • Operator

  • Thank you.

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

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

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

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

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

  • We'll pause for a few moments to receive questions.

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

  • Please state your question.

  • - Analyst

  • Sure.

  • Paul, I guess just first a couple questions about the ESPN deal.

  • You mentioned value pricing.

  • Can you give us an idea of what that's going to mean for the key products like ESPN-NFL?

  • Is that going to be back to the $39.99 that SEGA had tried before or is it going to be even lower than that?

  • And then you mentioned the multimillion dollar marketing program that was planned.

  • When multimillion dollars are being spent what level of responsibility is Take-Two going to have in terms of that spending?

  • And three, I guess if you could just kind of give me a little bit better idea of the philosophy behind this, I mean it's never seemed like SEGA has had a problem getting these products on the shelves before, or have had any issues getting full distribution.

  • Can you give us an idea of what their motivation was to sign a deal like this and what they were willing to give up to do it?

  • - President

  • First, we're real excited about this deal because of the product.

  • The product quality, we believe, is the best in the industry and we're looking to a great relationship with visual concepts.

  • We will support the products in the full fashion that they deserve with TV dollars and print as well as all the gaming publications that you started to see some of the reviews and previews on the product.

  • In terms of value pricing, we're firming that up right now but that is an important component and we'll compete at a price, you know, less than full price and we'll have more information for that in the near future.

  • We've had, you know, successful meetings with a number of retailers and all the leagues and we're formulating all the plans right now.

  • SEGA did, you know, get distribution on the products but the main competitor has, you know, increased their market share, so we think the combination of all the factors I've talked about, you know, firmly give us an opportunity to gain some market share, especially at this point in the hardware cycle where you have a mix of both hard-core gamers and you have casual gamers who have just come into the market or are coming into the market at the next Christmas.

  • So we think we can help expand the whole sports category.

  • We also think it's opportunistic with the two hardware companies dropping out of it.

  • In terms of SEGA's position they just want to focus on entertainment products at this point and they think that our distribution strength and our ability in the partnership with copublishing is a real added element to making this successful.

  • - Analyst

  • Then, Rich, if you could talk a little bit about, you talked about the kind of global product review that you've got going on and the decisions that have been made to hold some products for longer development cycles.

  • Can you give us an idea of what you think the right level of annual production in terms of SKUs is for the company and how those break out along frontline and value products?

  • Because judging from the 30 SKUs that you talked about having in development through the end of 2004 and the comments that you made in terms of, with regard to the frontline titles it sounds like there's an awful lot of value product in that.

  • - Chairman, CEO

  • Well, first we'll do, the three of us will answer the question, Heath.

  • First, in terms of, we have to do a much better job of forecasting, and we have to do a much better job of setting that release schedule to work within our model, so that we can get the desired results that we want in the marketplace.

  • - President

  • Heath, I think you understand we've typically been in the band of about 30 to 40 SKUs in a given year and now we've been adding Global Star, sort of value priced products in the mix.

  • They cost less but they do count numerically and they do add profitability to the business so we'll be seeing more of that.

  • I think Rich had made the point about making sure we were disciplined in our approach.

  • - Chairman, CEO

  • That's one of the things that we are focusing a lot of our energy on, is to make sure that the entire organization, that means senior management, line management, is more focused on developing realistic expectations and then on delivering them consistently time after time.

  • That goes to our earnings and it goes to our product release schedule.

  • And it's going to be a focus of our senior management team.

  • - Analyst

  • Okay.

  • Maybe to make it a little more manageable question, can you just give us an idea of the number of frontline internally developed products that you're focusing on for next year?

  • - President

  • Heath, it's a little early for to us get into 2005 yet at this point.

  • I would suspect that by the time we're on the phone call a couple months from now at the end of our third quarter results we'll give an update in terms of what we expect for 2005.

  • - Chairman, CEO

  • But if you look at the past year, and we have made several strategic investments in our product development teams, we have 650-plus people there, if you look at the past year the Rockstar guys launched Manhunt, Red Dead Revolver, followed up by San Andreas, which will then be followed up by Midnight Club and Warriors.

  • And then the Global Star approach has been in value products that we think the lineup is great at this point in the cycle with a lot of branded products like Army Men, Outlaw Golf, Sentinel Crisis, Dora the Explorer as we move into products like Codename: Kids Next Door, Corvette did very, very well, we'll be moving in Ford Racing similar to follow that up, Ultimate Fighting Championship, the Serious Sam area.

  • And the Gathering label, you know, finds that middle range of product, and they have a pretty robust schedule for the fourth quarter with Vietcong, Purple Haze, Robotech, Conflict Vietnam, First to Fight, just among those titles, so we do feel very good about the business going forward.

  • Operator

  • Our next question comes from Edward Williams with Harris Nesbitt.

  • Please state your question.

  • - Analyst

  • Good morning.

  • A couple of questions for you guys.

  • Can you give us a little bit more color as to what shifted from the July quarter onto October quarter and maybe give us at least a description of the title that shifted from the July quarter out of the year?

  • - Chairman, CEO

  • Ed, we had a title, we had a couple of titles that actually moved out of Q3 and Q4.

  • I wouldn't tell you that any of them were at the highest end of our unit count in terms of our product release schedule for this year.

  • So rather than get into a specific reconciliation name by name we' d rather support the franchises and you've heard what the revised lineup now is for Q4 from Paul.

  • I think in terms of what's moved out of the year we had had a product under development from Gathering that was in the works and we've looked at it now I think as we've looked at a number of things and made the determination that it's better served to be in 2005 than it is in the fourth quarter this year with some of the consumer demand in particular that we're picking up on San Andreas.

  • - Analyst

  • Okay.

  • And then can you give us an indication as to when we should expect Midnight Club 3 as well as The Warriors to ship?

  • You know, something more specific than just holidays, in terms of which quarter or which fiscal year it will be in?

  • - Chairman, CEO

  • At this time it's not in the fourth quarter but we're really focused on the release of San Andreas.

  • If we remember the impact that that title, Grand Theft Auto: Vice City, had on the marketplace we feel we're in a very good position because we'll have both those titles ready for the holiday season and we'll make the decision in the near future as to the placement.

  • - Analyst

  • Okay.

  • And then looking at the economics of the SEGA deal can you clarify what you expect?

  • Is this something where you'll be recognizing all the revenue and then paying out the portion to SEGA, or can you give us an idea as to what the margins might end up being like and also what the length of the deal will be like?

  • - CFO

  • Ed, I'll try and in no particular order address those.

  • For the balance of this year we don't expect this any really contribution towards the bottom line.

  • And revenues, when we look at it obviously you get into volume assumptions and some of the pricing things that Paul mentioned so we probably could tell you that we would be comfortable that it should be 20 million plus-type contributor to revenues so we're just going to hold our thoughts on the bottom line and assume that for the moment it doesn't really contribute anything there.

  • The opportunity is a large one and obviously depending on the variability in that unit count on the significant SKUs that we have with the sports lines that Paul mentioned it could perform above that.

  • In terms of the recognition of revenue this will be reported by us in full, and we will also take, you know, all the costs.

  • - Chairman, CEO

  • This is a multiyear copublishing and distribution agreement.

  • There is a provision that allows us to further extend our participation, you know, into the sports business and the associated intellectual properties.

  • For the first year we wanted to get our brand, the brand out there.

  • We want to get the hard-core sports gamer to play the product, to have the product and we want the casual gamer to be able to pick it up.

  • That's why we're looking at the value pricing.

  • We know we have very, very strong competition.

  • We look at it as an investment for us to get into this very lucrative part of the interactive game business.

  • - Analyst

  • Okay.

  • Just to clarify one point, though, the visual concepts is still a subsidiary of SEGA so the development cost that is incurred in creating the games is that born by SEGA?

  • And then it is theoretically covered, SEGA, you're paying SEGA, effectively, a royalty for that or are you actually incurring that?

  • - Chairman, CEO

  • We're sharing in all costs in this venture.

  • - Analyst

  • You're sharing in all costs.

  • Okay.

  • Thank you.

  • Operator

  • Our next question comes from Tony Gikas with Piper Jaffray.

  • Please state your question.

  • - Analyst

  • Good morning, guys.

  • A couple of questions.

  • Could you give us a little bit more detail on the quarterly revenues and earnings miss?

  • I know you just kind of gave us a high level.

  • And then second question, what percentage of titles here need more development, how much time do they need, additional time, I should say?

  • And do you think the studios really have their, you know, arms around the business right now and how much confidence do you have in studio management at this point?

  • - CFO

  • Tony, with regard to the miss off the second quarter and the reset for the year, I mean, we obviously, living at this point on our distribution business and to large extent our catalog business, and when we got into resetting the numbers back in the April time frame in the earlier part of April, we looked at contributors that have been significant for us in the past and quite frankly we expected their performance to continue to be strong.

  • Post the Easter holiday season we've not experienced that type of demand and we missed on terms of what we had expected for sales of those types of catalog products.

  • We've had no choice but to sort of roll that continued experience into the balance of the year and that's the principal reason why the numbers have been lowered for the remainder of the year as well.

  • I think we've addressed this on a number of fronts.

  • First of all, by, you know, the comments that Rich made with regard to realignment of our sales force that we're undertaking, putting some additional fiscal teeth in our compensation plans that people get rewarded for performance and meeting goals and that's worked for us successfully in the distribution business in the past and it's time now that we also bring that to bear on our publishing business.

  • So I think we can address this.

  • This is not.

  • We sell product every day, and getting to the right numbers on the page and setting the goals reasonably and achieving them I think I could speak for Gary and also for Rich, that's an important part of what we're here to do.

  • - Chairman, CEO

  • We're going to bring a new level of energy to meeting ship dates and meeting our financial and strategic objectives and expectation that people have of us.

  • - President

  • Tony, it's Paul.

  • Looking back, I think the plans were clearly overambitious.

  • We put a new management structure in place, we have a lot of experience in this room, and we're all accountable for setting and meeting the planning targets going forward.

  • This was not, you know, a fun call for us, and believe me, you know, we're all working, and we believe this new structure in place will ensure, you know, the profitable growth that we want to get to.

  • - Chairman, CEO

  • And in the process we've reset our expectations so that we can make sure that we deliver consistently against them.

  • As we've said already several times on this call, one of our problems in hindsight was being overly optimistic in our publishing schedule and setting up expectations for ourselves for 2004.

  • - Analyst

  • So again, I guess going back, a couple of quick follow-ups here.

  • Do you have confidence in the management teams at the studios?

  • And since you opened up the compensation question, is it possible that the heads of these studios are not the highest paid people in the company going forward?

  • - President

  • This is Paul.

  • First, absolutely we have confidence in the studios and what they've done.

  • If you look at the past three years it's a tremendous record of achievement.

  • In terms of compensation, we will all feel, you know, the pain of not being accountable, of being accountable for the compensation plan.

  • - Chairman, CEO

  • Right.

  • The accountability has got to start in the senior management part of the organization and we have every intention of doing just that.

  • As Paul said, our internal development studios have consistently met publishing deadlines.

  • They've a very good track record.

  • - Analyst

  • How would you characterize, you know, where the breakdown has been?

  • I think we've brought numbers down now five times in the last six month.

  • Is this bad information coming from the studios?

  • Is this just the retail environment hasn't been as strong as you had thought, feedback from retailers?

  • Where's the breakdown been?

  • - Chairman, CEO

  • Tony, I think if you step back a little bit and you looked at this business, let's say last summer or late spring last year, you would have understood from the comments that we made, and I think you appreciate this that we were giving our number one franchise really a breather in terms of a new game into the marketplace.

  • We were successful in, if you will, extending the life of the Grand Theft Auto franchise in a couple of creative ways but we also had talked about putting a number of new franchises into the marketplace this year and basically expanding those of breadth and reach of our development capabilities internally.

  • In part we've been successful on that.

  • We've had Manhunt, Red Dead Revolver and these games while to everyone's different expectations may perform one way or the other to our standards they've been very successful to date.

  • On the other hand we've had a number of things now in the second half of the year that I think as you've looked at the overall publishing pipeline that we did set ambitious goals.

  • And if you take that in the context of some of the other management changes and some of the other things that have occurred within this business in the last six months it's only been prudent to really put a little breather into the schedule, get things properly lined up into the holiday season, really play off our strengths but that has a very serious impact financially when you start moving products and resetting expectations.

  • So, you know, the catalog business we're clearly disappointed in terms of our own expectations but the rest of the business I think we're doing the right things for good strategic reasons but they have a financial impact.

  • We believe we've now addressed those.

  • Operator

  • Our next question comes from Mike Wallace with UBS.

  • Please state your question.

  • - Analyst

  • Hi.

  • A couple of questions.

  • Let me start with distribution business.

  • The SEGA deal, will this be publishing or distribution revenue?

  • - Chairman, CEO

  • We'll be viewing this as a publishing-type opportunity for us.

  • Having said that, it's going to be the value price orientation, but since we are on, responsibility as a copublisher and taking accountability for marketing and all the things you expect a publisher to do, that's naturally where it would fit.

  • - Analyst

  • So it will show up in your publishing line?

  • - Chairman, CEO

  • We'll be very clear I think going forward since this is a new strategic opportunity for with us a number of significant SKUs and as Paul mentioned a real positive opportunity for us going forward to make sure that we give you feedback and tell you how that business line is doing.

  • - Analyst

  • Okay.

  • In the past you talked about distribution gross margins kind of in the low double-digit range and this quarter distribution sales were disappointing.

  • Have the margins dropped there, and what was the reason that distribution was disappointing this quarter?

  • - Chairman, CEO

  • What I said, in fairness is that distribution, when we reset the numbers in mid-April and missed the sales target, I put that last on the list.

  • It was a modest miss.

  • And yet overall we're very pleased with how that business has performed in the second quarter.

  • It has grown significantly year-over-year and every quarter that we've reported recently and it continues, I think to take advantage of this point in the cycle of consumer demand of value-oriented impulse-type purchases.

  • And Paul described I think further the opportunity for the balance of the year and throughout '05 we would expect that this business would continue to perform very well.

  • - Analyst

  • So can we assume the margins are in a similar range, the gross margins?

  • - Chairman, CEO

  • We have no information to tell us that they should be moving materially at any point in the near future.

  • We'll have to see as the next cycles set up.

  • Obviously the orientation of the business would change at that point.

  • - Analyst

  • My understanding was you had a big Vivendi deal about a year ago that's running up.

  • Is that going to hurt the distribution sales?

  • - Chairman, CEO

  • We've certainly done business exclusively with a number of people.

  • We've not commented on any one particular publisher.

  • Those types of deals continue and I think speak to the strength of the Jack of All Games, you know, business to distribute product in a very meaningful way so we don't have anything at this point that we would care to discuss with regard to the upcoming holiday season but if history is any indication of the future, we will continue to, you know, advantageously take people's phone calls and help them place product.

  • - Analyst

  • Now on the publishing side, it seems like, you know, everything non-GTA related has been disappointing, at least relative to Wall Street expectations.

  • Are you going to change your policy?

  • You guys never show any games and you're very secretive.

  • Someone asked a question earlier, what game shifted from Q3 to Q4 and you wouldn't tell us.

  • Why not?

  • Why not be a little more open about the release schedule and maybe showing some games just so people aren't blindsided and we have a better idea of what's coming?

  • - President

  • Let me answer in that three parts.

  • In terms of saying the other products were disappointing, it all depends on your expectations.

  • Max Payne 2 did very well, it just didn't do the levels that we expected and other people expected.

  • It is clearly a very big brand, and we've gone back to the drawing board in terms of how we market product, how we put the feature set in the various games, especially the sequels.

  • That was followed up by Manhunt which had lower expectations but certainly established as a brand out there in the marketplace and performed very well.

  • Red Dead Revolver is a new genre but has performed up to our expectations in the market and I definitely, based on the coverage and the feedback we're getting, that that's an established brand.

  • If you look at, in terms of marketing, what we're doing differently, two years ago on Vice City we announced it at the E3 show.

  • At this E3 show you had a full cover story with ten pages from the largest, you know, game publication with the largest circulation.

  • So we're out in front of that and the presells at Electronic Boutique and GameStop, in terms of the anticipation based on some earlier marketing and based on giving that brand a breather, by not having that product last year, I think we'll see the results in San Andreas, and our team is very excited about that game in particular and what they've done to it.

  • They will deliver the same type of gaming experience that people experienced with Vice City in comparison as they purchase San Andreas.

  • So we're getting out in front of it.

  • You're 100% right in terms of not naming a title.

  • From time to time we will do that but I think we'll gradually move towards more exposure.

  • Traditionally we spent money when a product shipped or post-shipment, and we're adjusting adding spending, you know, advertising dollars and giving the products marketing support prior to shipment.

  • - Chairman, CEO

  • And I would add, you know, we're particularly sensitive on new franchises and brand names because even from a name, you know, our competitors can pick up a direction of where the studios are headed, and there's clearly a price to pay for that secretiveness but we think it's been very successful in terms of marketing and launching product very successfully in the past.

  • - President

  • Midnight Club: DUB Edition we showed to the gaming press and to the key customers at E3.

  • That's way in front of what we traditionally do.

  • So we're moving towards that.

  • - Analyst

  • Just, I mean, I know, you know, Max Payne put up good numbers and the Manhunt numbers are pretty good but you've still had to take earnings down.

  • I guess what I'm getting to is, does there need to be another structural change in the development group?

  • I mean, why were expectations higher for these games?

  • Is there something you have to go back to the drawing board on the type of games you do?

  • What's your thinking on why the non-GTA stuff has either disappointed or forced you to take your numbers down?

  • - President

  • Well, Max Payne is significantly different than Manhunt in terms of it performed in the marketplace just not up to our levels of expectation, and then I guess we did get a double hit because the catalog sales weren't there as we moved the price down.

  • They're starting to pick up now as a greatest hits-type product in that lower pricing, so we think that's positive.

  • - CFO

  • But clearly with regard to, you know, Warriors and the other Gathering game that's moved out of the year I think we've taken the time at this point in the development of these new franchises of really making sure we give them the appropriate time for development, and Paul mentioned, you know, the lessons we've mentioned elsewhere in this call, the lessons that we've learned this year and on one hand we've drawn a variety of comments about how our holiday season performed last year, some of which were positive, others were negatives and one of the take-aways from that is don't bring something to the marketplace unless you're sure that it can be successfully launched and supported, and that goes to marketing as well.

  • - Chairman, CEO

  • Just one note.

  • Mike, one of the reasons I'm so excited to be back here is the relationship that I have with the Rockstar guys, the Gathering guys, and the Global Star people and working in that environment that is really exciting from a product development standpoint.

  • So in terms of moving forward I feel very, very confident about this release schedule.

  • Operator

  • Our next question comes from Shawn Milne with Friedman, Billings, Ramsey.

  • Please state your question.

  • - Analyst

  • Thanks a lot.

  • Karl, I wondered if you could address your comments about lowering operating expenses?

  • So far what we've heard on the call is putting more systems and plans in place to make sure development's on time, you're picking up a new copublishing agreement with ESPN that's going to cost some money in the near-term.

  • Can you walk through really where the 10 to $15 million in annual savings is going to come from?

  • Is it really just compensated related?

  • The second question is, you talked about raising your expectations for GTA volume in the fourth quarter.

  • Can you give any more detail around that?

  • Thanks.

  • - CFO

  • The annual plan that we've put in place is, you know, first of all, driven keenly obviously in the compensation area.

  • We're going to be taking a very hard look at how, as Rich mentioned, with the help of a nationally recognized consulting firm, on how people are compensated.

  • Yet we would expect some savings to come from how we restructure certain parts of the business we've talked about this morning.

  • We're taking a, we've put into the plan every component we can think of in terms of variable spending that we do and since all costs ultimately are variable, that leads nothing untouched but it would include such things as can we do a better job in terms of how we spend money in travel and plans like that.

  • Also, with regard to the monies we spend on third-party professionals, can we be more systematic about how we take on those costs.

  • - Chairman, CEO

  • Can we be more efficient in our sales activities?

  • We're taking a very hard look at the dollars spent in corporate overhead to make sure that all of those expenditures are necessary and appropriate.

  • We're taking a very hard look at the costs associated with operating this entire business and squeezing out excesses where they exist.

  • - President

  • And I think, Shawn, we'll give you an update when we're looking backwards at the end of the third quarter in terms of the specific components within that.

  • I think you can tell from our comments that it's not two single line items off of a detailed spending list for this company but we're looking into every area of this company to squeeze whatever efficiencies we can, and this is the range that we're comfortable with that we've identified thus far.

  • - Analyst

  • And just on GTA volume expectations, you said they would be higher?

  • - CFO

  • Yeah, we're not going to get into a fixed percentage here this morning.

  • We had mentioned the 15% in the past.

  • It is higher.

  • We are taking that number up in part based on the commentary that we've heard from consumer expectations, passed along to us by certain retailers and what they're seeing, even in terms of foot traffic and consumer questions within the stores.

  • So at this point we're comfortable in taking the number somewhat higher and we think the demand already evident sitting here in the month of June supports that.

  • - Analyst

  • Let me just be clear.

  • So the revenue number's already coming down, so is it higher percentage of revenue or a higher unit number?

  • - CFO

  • It's a higher percentage of revenue, and in part the revenue number's coming down for the reason we've discussed about the catalog business, the movement of product out of the fourth quarter offset in part by some increased volume on San Andreas and even to a lesser degree some better results that we expect out of our distribution business for the balance of the year.

  • - Analyst

  • Thank you.

  • Operator

  • Our next question comes from John Taylor with Arcadia Investment Corp.

  • Please state your question.

  • - Analyst

  • Hi.

  • I've got a couple of questions.

  • Given the effort to do some looking at the cost side and a little bit of restructuring, you guys anticipate any kind of one-time charges for that, that might be distributed through the remainder of the year, next year?

  • And then on the SEGA deal, if you guys are going to share in the cost side of things, how do you expect to account for the development costs?

  • Is that going to be capitalized, or are you going to expense that as you go through it?

  • And then the third question and last one is, can you give us a little update on the, whatever metrics you're seeing or watching for online game usage, the percentage of people that maybe are getting online or an absolute number, just give us a sense of trend line, anything that might suggest how people are actually using the online features in the games you're building.

  • Thanks.

  • - CFO

  • John, with regard to the cost savings plan any charges that we would expect to take would be early on, we don't expect those to be significant and we've effectively put that in our numbers in terms of our own thought process.

  • With regard to the SEGA, the accounting for the SEGA deals, subject to the final agreement, you know, being reached, we're obviously comfortable talking about it at this point given where we stand with regard to that deal but we will account for this as we do with regard to other third-party deals and it will follow the same exact accounting policies, which when money is advanced, will be capitalized and expensed appropriately.

  • And then finally, with regard to online gaming.

  • - President

  • We feel very positive.

  • Our Rockstar guys in particular, the guys that are online playing, we're seeing it move into the casual side and we're adjusting some of the product features.

  • We've put it in three games in the past release schedule but we're not seeing a giant movement yet, J. T.

  • - Analyst

  • Is there any way you could kind of give us a sense?

  • Are you seeing like 5% of the people who bought the game move online?

  • Or 10%?

  • Any number like that?

  • - President

  • In that range.

  • Operator

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

  • Please state your question.

  • - Analyst

  • Thanks.

  • Just actually a couple of questions.

  • This is a follow-up on GTA.

  • Karl, you made reference to the percentage in relation to sales likely being higher in part because of sales numbers coming down.

  • In terms of unit volume, presumably, based on your comments, you're looking for something a bit higher.

  • Could you characterize the something a bit higher being meaningful or less than meaningful?

  • And then secondarily is there any potential impact on the prospect of pricing San Andreas at a premium price point?

  • - CFO

  • Stewart, I think taking it in reverse, with regard to pricing, nothing that we can say this morning with regard to any decision on that.

  • It's obviously going to be a full-priced product but no comments this morning as to whether it would be anything higher than the normal full-price $49.99.

  • And then with regard to the incremental amount of San Andreas, I really don't want to get into the, you know, word fencing of how much more is more.

  • It is more, but for reasons that we think are important to the successful launch of the game we really don't want to get into an open-ended discussion of exactly how much that is then we get into how much that breaks down by our significant customers and things like that.

  • So for the successful launch of the game we're just going to hold our comments to saying that it's more.

  • - President

  • The indicators, you know primarily in the presell area and from a couple of customers, in terms of the quantities that they have projected or anticipate us filling orders, are very, very high, higher than Vice City, and we're also shipping this game on the 19th, so there's several turns before that quarter ends going into the first quarter of next year, and we want to manage that so we fill the majority of the demand.

  • And then we're also very excited that we'll have two other titles in that holiday season right now that we're planning with Warriors and Midnight Club 2, Midnight Club 3: DUB Edition.

  • - Analyst

  • Okay.

  • And then just two other things.

  • Just to go back to Mike Wallace's comment and maybe I'd direct this to Rich, pretty much all of Take-Two's peers in the industry give fairly precise visibility on SKU counts by platform almost a full year in advance.

  • And recognizing that things shift around would you at least say that you aspire to, you know, give the kind of visibility that's fairly common for your peers which, you know, at this point, Take-Two really hasn't been doing?

  • - CFO

  • I think, you know, we've given, and this is Karl speaking, we've given a fair amount of daylight increasingly over the last several years in terms of SKU counts and things like that.

  • We clearly have also debated most recently about what can we do to better improve the communication with the street in terms of our expectations and we will be open to looking at ways to do this better.

  • It obviously goes to the level of accountability and the discipline that we will apply throughout the organization, every employee, whether in sales, development, it doesn't matter which group, finance, administration, is going to get behind the schedules that we commit to, and we'll take the responsibility to make sure we communicate those as clearly as possible.

  • All within the context of still some of the sensitivity about the new games we bring into the marketplace.

  • - Chairman, CEO

  • All I can tell you is that this is an area that we discuss often to balance the needs to be more communicative with the needs that we have as a publisher.

  • - Analyst

  • It just seems like in a business where you're planning products two years in advance, to not be able even to give SKU counts more than two quarters in advance, you're definitely lagging your peers on that.

  • - CFO

  • Since we'll be addressing 2005 I think next period we may have the opportunity to do a different approach on that, and we'll certainly take your comments as well offline in terms of any specific details you think we could offer up that would be most meaningful.

  • - Analyst

  • Appreciate that.

  • Final thing, stock repurchase.

  • Is there any update on the attitude towards the legal issues relating to stock repurchase during a time when you're still under this SEC investigation?

  • Would the ongoing SEC investigation, do you continue to believe that that would prohibit you from doing stock repurchase, or if you can give us your updated thoughts on that?

  • - Chairman, CEO

  • Just to remind you that we have a planned $25 million stock repurchase plan in place that the board approved in January 2003, and it continues to be our policy that we will act on that plan when we believe it is both in the best interest of the company, consistent with applicable laws and regulations.

  • - Analyst

  • So it's not clear that the SEC investigation itself prohibits you from being active in the plan?

  • - Chairman, CEO

  • I would just repeat what I said that we will act on that plan when we think it is in both the company's best interest and consistent with applicable regulations.

  • - Analyst

  • Gotcha.

  • Okay.

  • Thanks.

  • - Executive Vice President

  • Operator we'll take one last question.

  • Operator

  • Our final question comes from Gary Cooper with Banc of America Securities.

  • Please state your question.

  • - Analyst

  • Hey, a couple of questions on that issue there.

  • You talk about the company, the best interest of the company.

  • How do you think about the shareholders in that situation?

  • It seems pretty obvious to me that if you have confidence in GTA: San Andreas, and maybe you don't, maybe that's what's preventing you from taking the step forward, but if you had confidence in GTA: San Andreas, repurchasing your shares today in particular, it would seem like a wise move given the fact that whatever cash you spend in that area would be earned from the release of that game.

  • So you talk about what's best for the company.

  • How do you think about the shareholders in that situation of the share repurchase?

  • - Chairman, CEO

  • When I say the company, I also mean our shareholders, too, but again, I'll reiterate, and this is a subject that we think long and hard about, and we will do what is in our collective interest at a time when we can do it consistent with applicable regulations.

  • - CFO

  • And I think, Gary, all of our comments this morning, with regard to, you know, our premier franchise, Grand Theft Auto, our expectations for San Andreas have been nothing but positive and supportive.

  • - Chairman, CEO

  • Couldn't be higher.

  • - CFO

  • We've been reviewed in a nationally recognized magazine and the commentary and expectations thus far, and this is not our own fault sitting in the closet, but from people from outside the organization commenting in on what they've seen or heard has given us every indication to believe that this game will be very successful.

  • So I just want to state emphatically that we are supportive of that franchise and the work that's been done on San Andreas over the last two years.

  • - Analyst

  • Okay.

  • Then given that statement, I mean it would it make sense to me that repurchasing your shares would be an action that would support that belief.

  • - CFO

  • Gary, I think we've said what we can say with regard to the actionability of that plan, and stay tuned.

  • - Chairman, CEO

  • Gary, I think that's just one action, though.

  • There are a lot of other actions we're taking place to show our complete support of the company, and particularly the product line going forward.

  • You know, I returned here because I believe in the company.

  • I also believe the tremendous wind that a key title puts at your back that we didn't have for the past year.

  • So I have a lot of confidence in the Grand Theft Auto brand, the Rockstar development group that put their hearts, souls, mind and passion into this product and I just invite you to read that first preview article from Game Informer and then every month you'll be seeing another one.

  • We're pretty excited about the product line going forward This was a tough call in a tough quarter but we're very excited about the future.

  • Operator

  • Thank you.

  • There are no further questions at this time.

  • - Chairman, CEO

  • Thank you all for joining us.

  • - President

  • Thank you.

  • Operator

  • This concludes today's conference.

  • Thank you for your participation.