Take-Two Interactive Software Inc (TTWO) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

And welcome to Take-Two Interactive Software first quarter 2005 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, 0 on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Cindi Buckwalter, Executive Vice President of Take-Two Interactive Software.

Thank you, Ms. Buckwalter, you may begin.

Thank you.

And good afternoon, everyone.

Welcome to Take-Two's conference call for our first quarter ended January 31, 2005.

Thanks for joining us today.

Before we begin 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, 2004, which may be obtained from our website or by contacting the SEC.

Today's call will consist of a presentation by our Management Team, followed by a question-and-answer period.

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

Let me give you a brief overview of the quarter before you hear from Paul and Karl.

This is a milestone quarter for Take-Two and a terrific start to fiscal 2005.

We generated record-quarterly net sales of 502.5 million and EPS of $1.19.

Both sales and EPS exceeded our guidance, and we show positive cash flow of 185 million in the first quarter, bringing our cash position to over $300 million, a record level for Take-Two.

A major contributor to our strong Q1 results was Grand Theft Auto: San Andreas, which continues to be our top-performing product and has been the top selling PS2 title in the United States for the past 4 months.

Once again we have exceeded expectations with this title.

Our 2K Sports line also remains strong and Jack of All Games bounced back from a tough Q4 when its performance was impacted by hardware availability issues.

We made progress in our diversification strategy, including initiatives to strengthen our sports offerings.

We established a new publishing label, 2K Games, along with 2K Sports, their Sports Division who have already announced an [attractive] lineup of products, and we've [strengthened] our internal development capabilities with the purchase of Visual Concepts and Kush Games.

Paul will discuss all of these developments in more detail later in the call.

We are extremely pleased with our financial results, the strength of our proven brands, and our progress in building a pipeline of diversified products based on a combination of our own IP and high-profile licensed properties.

We are confident in our future, and today are providing fiscal 2005 guidance that reflects topline growth of 15 to 20 percent, and more significantly, bottom line growth of 31 to 38 percent.

Now let me turn the call over to Karl to discuss our financial results and guidance in more detail.

Karl?

Thanks, Cindy.

And good afternoon.

Net sales from the first quarter were 502.5 million, a record level for Take-Two, and an increase of over 30 percent, compared to 375.5 million a year ago.

Net income of 55.2 million rose by 74 percent from net income of 31.8 million last year.

Diluted EPS of $1.19 increased 70 percent, compared to diluted earnings of $0.70 per share in the first quarter of 2004.

Sales of Grand Theft Auto: San Andreas, drove our strong first quarter results, representing 57 percent of the quarter's total revenue.

Our 2K Sports title has also contributed 6 percent of total sales in the quarter.

Grand Theft Auto: Vice City for PlayStation 2, which shipped over 2 years ago, along with the Grand Theft Auto Double-Pack for Xbox, which shipped last year, continue to be Top 10 Titles for us, once again proving the strength and longevity of the Grand Theft Auto franchise.

Our Jack of All Games distribution business improved from Q4, but overall distribution sales were up only modestly compared to Q1 last year.

Jack realized strong sales in the first quarter from the large slate of new software titles released industry-wide, and they continue to generate sales from the creative assortment of value-driven products, which were well-received in the holiday season.

Although Jack's hardware business improved from Q4, console hardware supplies were still limited in the first quarter, which translated into lower sales of higher-margin, budget-priced products which typically go hand-and-hand with new sales of hardware at this point in the console cycle.

The performance of San Andreas, above our expectations in the quarter, drove our publishing business to 71 percent of revenue with distribution representing 29 percent of revenue, compared to our publishing distribution split of 62 versus 38 percent last year.

Our gross profit margin for the quarter was approximately 36 percent, compared to about 34 percent last year.

The primary reason for the increased margin was related to our business mix as our higher margin publishing business represented a larger percent of revenue compared to last year's first quarter.

And the significant percentage of our publishing business came from our internally-owned and developed Grand Theft Auto franchise.

Turning to the components of COGS.

Product cost increased in dollars through the significant growth in revenue year-over-year, but declined as a percentage of revenue as our business mix was more heavily weighted toward publishing than last year.

Royalties increased significantly in both the dollar basis and as a percentage of publishing revenue.

The increase was primarily attributable to internal royalty expense associated with our publishing sales.

Additionally, royalty expenses increased as a result of royalty payments and amortization of prepaid royalties for externally developed and licensed products sold in the quarter, such as our Sports titles.

Lastly, we wrote down approximately 3.4 million of external software development costs and licenses in the quarter, compared to 1.3 million in write-downs in Q1 last year.

Software development costs increased in dollars, but declined as a percentage of publishing revenue.

All categories of our operating expenses in the first quarter increased in dollars as our business grew.

The increase in sales and marketing expenses, compared with Q1 last year relates primarily to expanded advertising and promotional support for our products, led by our advertising campaigns for San Andreas and our Sports titles.

General and administrative expenses increased from last year as we have expanded our financial and operational infrastructure, as well as our Senior Management Team to support our continued growth.

R&D expenses increased from Q1 last year due to several development studio acquisitions.

We've also added additional staffing in our studios reflecting our strategy of bringing more development in-house.

Our head count in R&D has increased over 70 percent from January 2004 to about 1,050 people at end the of January, 2005.

Our tax rate for the quarter was approximately 25 percent, due primarily to our geographic mix as we had a significant contribution of business from our international operations where we operate at lower effective tax rates.

Based on our projected mix of business for the balance of this year we expect to maintain this rate for fiscal 2005.

As expected, with the strong sales of San Andreas in Q4 and in Q1, we generated positive cash flow from operations of approximately 185 million in the first quarter, compared to about 88 million in the first quarter last year.

At the end of the first quarter, we had a record level of cash, over $300 million, as compared to 254 million in cash at this time last year.

I would like to briefly review some other key balance sheet items.

Net accounts receivable at the end of the first quarter were approximately 137 million, compared to 286 million at year-end and 145 million at this time last year.

The majority of the receivable balance at the end of Q1 was for our publishing business.

Our DSOs were 25 days, compared to 59 days in the fourth quarter, and 35 days in the first quarter last year.

Our accounts receivable reserve stood at about 80 million at the end of the quarter, representing approximately 37 percent of gross receivables.

The slightly increased reserve levels from Q4 are due to the large volume in business shipped in the first quarter.

As a percentage of gross receivables, our reserves are comparable to Q1 last year when they were about 36 percent of gross receivables.

Our Q1 reserves represent approximately 8 percent of trailing 6 months revenue and about 7 percent of trailing 9 months revenue.

Inventories at the end of the quarter were approximately 134 million, down about 20 million from last quarter.

About 65 percent of our inventory balance relates to our distribution business, with over 85 percent of the domestic distribution of inventory consisting of products with cost of goods below 14.99.

Turning now to our software development costs.

Beginning this quarter, we have modified certain line items in our balance sheet to better reflect our evolving business model as we have begun diversifying our portfolio into the area of sports and other license products.

We have added a new line item to the asset side of our balance sheet called "licenses."

In addition, while previously the software development line item on our balance sheet only included internal software development costs, we have now included internal and external software development costs in this line item.

We have reclassified our prior period numbers to conform to our new presentation.

We believe this change to our balance sheet provides more visibility into our business and is more comparable to our peer group.

Our software development costs total about 93 million at the end of the quarter, compared to about 64 million at the end of the year.

The increase in software development costs since year-end relates primarily to the significant ramp up in new products that we have recently announced for our 2K Games label, including high profile titles like Oblivion and Civilization.

Additionally, the increase in software development cost includes many of the Sports titles being developed at our internal studios.

This is in line with the continued execution on our strategy of further expanding our portfolio breadth and depth.

The increase also includes titles that Rockstar is working on internally for near-term releases, such as Midnight Club 3: DUB Edition and The Warriors.

We currently have over 140 products in various stages of development, of which approximately 70 are planned for the balance of fiscal 2005.

Moving on to guidance.

We are raising our second quarter revenue guidance slightly to 200 to 210 million in net sales, and are firming up our EPS guidance to a loss per share of $0.20.

The slight increase in revenue guidance is based on incremental volume we are seeing in our publishing business.

However, the added margin is being offset by investment spending in several areas.

We have been rapidly scaling up our 2K Games and 2K Sports organization in anticipation of a robust portfolio for fiscal 2006.

And recognizing the increasingly competitive landscape, we have slightly increased our marketing budgets in the quarter in conjunction with several key product launches.

Additionally, have realized incremental overhead in the quarter following our acquisition of Visual Concepts and Kush Games, which was not factored into our original guidance.

For the third quarter, we were providing initial guide of 220 to 240 million in net sales, and EPS of $0.05 to $0.15.

We are raising our fiscal 2005 revenue guidance to 1.3 to 1.35 billion in net sales, which represents topline growth of approximately 15 to 20 percent from fiscal 2004, and we are tightening our EPS guidance to the high-end of our original range to $2.10 to $2.20.

We continue to expect our fiscal 2005 operating expenses to remain relatively constant as a percentage of revenue compared to fiscal 2004 as our guidance assumes continuing investment of additional resources and development, including the current and next-generation console and handheld products.

And as I mentioned earlier, we are aggressively building our 2K Games and 2K Sports business, and have incremental expenses related to our recently acquire Sports game development studios.

With that said, even with this year's investment spending for our future our full fiscal year 2005 guidance represents bottom line growth of 31 to 38 percent.

Lastly, although it is too early to discuss our guidance for fiscal 2006, we think it is important to note that despite some likely challenges next year in year-over-year quarterly comps, we are targeting top and bottom line growth for fiscal 2006.

We look forward to speaking with you again when we report our second quarter results.

At this point, I'll turn the call over to Paul to cover our product lineup and additional corporate developments.

Paul?

Thanks, Karl.

I apologize for a cold that's affecting my speaking voice, but it is by no means indicative of my intensity or the strong feelings about how hard we are working and what we are trying to accomplish at Take-Two.

Q1 was a record revenue quarter for Take-Two and at a very important time in our Company's growth.

There is an excitement throughout the entire Company.

This is a feeling shared by all Rockstar employees, because of their groundbreaking, record-selling title Grand Theft Auto: San Andreas.

The excitement is also shared by 2K Games, which has been very successful in Sports, and has been awarded a number of high-profile license properties, including the long-term, third-party exclusive MLB license.

It is shared -- it is a feeling shared by all Take-Two employees.

Everyone feels an individual sense of accomplishment.

Q1 was highlighted by the overwhelming global impact of Grand Theft Auto: San Andreas.

Sales of the title through January 31st were over 12 million units.

Rockstar has once again proved that they can raise the bar, exceed expectations, and consistently deliver compelling content to the global market.

In London earlier this week, Sam Houser, President of Rockstar Games; and Leslie Benzies, President of Rockstar North, were honored by BAFTA, England's equivalent of the Academy Awards, with the Academy Special Award.

The award is an acknowledgement of their outstanding contribution to the entertainment industry.

We congratulate Sam, Leslie, Dan Houser, Terry Donovan, and the entire Rockstar Team on their continuing achievements.

During the quarter, we shipped College Hoops of PlayStation 2 and Xbox.

The title received excellent reviews on both platforms.

In fact, our games are the highest rated college basketball games in the market.

Sales for the 2K Series of Sports Games remain strong as we continue to make inroads in establishing 2K Sports as a major player in the lucrative Sports Games Business.

Jack of All Games posted solid quarterly results as it captured holiday sales.

Jack's Management remains focused on valuated services with it's varied customer-base and innovative retail value programs.

Moving on to Q2.

Rockstar's Midnight Club 3: DUB Edition will hit the shelves starting in April for the PlayStation 2, Xbox, and PSP.

Midnight Club 3, the third title in the highly-successful racing series from Rockstar San Diego, features over 60 licensed vehicles, hundreds of customizable aftermarket parts in 3 great American cities, San Diego, Atlanta, and Detroit.

In addition to a Rockstar multimillion dollar marketing campaign, they have partnered with DUB Magazine to reach the core car enthusiast.

Favorable previews have appeared in all major gaming and lifestyle outlets.

And select media have recently been given a chance to get their hands on the game.

After having some time playing Grand -- Midnight Club 3 a recent preview on IGN states that this game has a sense of speed and handling like no other racer.

From 2K Sports we just launched Major League Baseball 2K5 for PlayStation 2 and Xbox.

Reviews of the game have been outstanding with IGN saying, MLB 2K5 is the best baseball presentation ever imagined.

Designed by our internal studio Kush Games, Major League Baseball 2K5 is all new and sets the standard for baseball video games. 2K5 has a completely new graphic engine that brings player models, animations, and cut scenes to breathtaking detail.

The presentation is enhanced with 2K's new camera angles and chase cams, and commentary from Karl Ravech, Jon Miller, and Hall of Fame legend, Joe Morgan.

Also this quarter, 2K Games will be shipping Close Combat: First to Fight, developed with the U.S.

Marine Corps for PC and Xbox.

And the sequel, Stronghold 2, the ultimate castle simulation for PC.

Later in the quarter, 2K will be shipping Ford Racing 3 for PlayStation 2, Xbox, and PC in North America, as well as Mustang Racing for PlayStation 2 and Xbox.

From Global Star this quarter we'll be shipping games based on the popular MADD Magazine Cartoon, Spy vs.

Spy, and the third sequel for Motocross Mania.

In Q3 we will be extending our Grand Theft Auto: San Andreas Game to Xbox and PC, supporting the launch with a significant marketing program.

We're excited about the prospects of bringing this title to the Xbox, based on our success with the Grand Theft Auto Double-Pack last year, and the continued success of other recent high-profile Xbox titles.

We'll be releasing a grand -- a brand-new Grand Theft Auto title exclusively designed for the PSP platform.

This game is a new compelling story line set in Liberty City.

We are excited about this opportunity to bring our No. 1 brand to the portable market.

For 2K Games our plans include Charlie and the Chocolate Factory on multiple platforms in conjunction with the release of Warner Bros. blockbuster feature film this summer.

Top Spin, which we recently acquired from Microsoft, was the best-selling tennis game on Xbox.

We'll be extending this game to other platforms.

The long, awaited debut of Rockstar's interpretation of the classic cult film, The Warriors, is now scheduled for release on the PlayStation 2 and Xbox in September.

The Warriors will feature the characters, scenes, and locales from the gritty 1979 movie about a young New York City street gang's fight for survival.

Marketing and advertising are being coordinated with Paramount Pictures, distributor of the original film.

Also in the fourth quarter Rockstar is planning to introduce Grand Theft Auto: San Andreas for the PlayStation 2 in Japan.

We have had excellent reception to Grand Theft Auto 3 and Vice City in Japan, and are very optimistic about San Andreas's potential during the early holiday season in the Japanese market.

Rockstar also plans to ship 2 new PlayStation 2 titles for the next holiday season.

One in our Q4 and the other in our '06 first quarter.

As we look out to Q4 and fiscal '06, I would like to recap some of the recent announcements by our 2K Games label.

In January we acquired assets from SEGA, including the 2K brands and leading Sports Games studios, Visual Concepts and Kush Games.

Visual Concepts produced the football and basketball products, while Kush produced hockey and this year's baseball game.

The acquisition complements our Indie Built Studio, which we acquired from Microsoft giving us tremendous internal development resources. 2K brings us a rich history and a strong label from which we can build upon.

Our long-term strategic goal to diversify our product line, includes both strengthening our in-house development resources and the ability to add and create new content.

We eagerly anticipate starting our long-term third-party exclusive agreement with Major League Baseball in '06.

Baseball is the major sports foothold that enables us to leverage our product development capabilities with our distribution and marketing resources.

We are also close to concluding our negotiations for a long-term renewal with the NBA for a nonexclusive agreement.

We hope to have more to say about the NBA in the coming weeks.

During the past year, we have proven we can successfully compete in the sports business.

We believe our passion for sports at the most senior level of this organization is a major advantage for us.

Under 2K Games, we have made progress in building content.

We announced the acquisition of the publishing rights to the Civilization franchise, a PC strategy series that has sold over 5 million units.

We will be shipping Civilization IV for PC in late '05. 2K has begun a long-term relationship with world-renowned developer, Sid Meier, and his studio FIRAXIS.

We look forward to publishing future expansions of the CIV series and additional PC and console games. 2K also recently announced a co-publishing agreement with Bethesda Softworks, for the highly anticipated RPG title, The Elder Scrolls IV, Oblivion, for PC in '05 and a next-gen console system.

Other recently announced 2K titles include the North American publishing rights for Conflict: Global Terror, Reservoir Dogs, and Carmageddon.

Conflict: Global Terror is the fourth title we have published in the series.

We have sold over 2.5 million units in this series in North America.

The title will be available for console and PC in time for the holidays. 2K Sports also recently announced games based on the World Poker Tour hit television series.

The games for console, PC, and handheld systems will simulate the excitement of the TV show.

Poker is one of the world's most popular past times and a natural fit for our lineup.

And during the second half of calendar '05, we'll move to capture the growing base of casual family gamers.

Our plans include extending 2 successful licenses, Dora the Explorer and Codename: Kids Next Door to the console market.

We just returned from destination PlayStation.

The excitement about the PCP is tremendous and we were all pleased that Sony has committed to 1 million units of hardware at the launch in North America.

We showed Midnight Club 3: DUB Edition and received a great response.

Our recently released MLB 2K5 was positively received as well.

Looking to the future our long-term strategy is relatively straight forward.

Today we are well-positioned to leverage our strength as a top tier publisher.

We are aggressively exploring every opportunity and positioning ourselves to move quickly in our goal to build our library of content.

We are making strides to diversify our business and will continue to execute on this strategy.

Today we are in outstanding competitive position, and I'm proud to say that Take-Two has the best development resources and most creative minds in the industry with over 1,000 people dedicated to product.

We have ability to continue to publish on the current platforms and the resources to publish games for the PSP and next-gen systems.

Our financial position is solid.

Our balance sheet is stronger than ever with over 300 million in cash and no debt.

We have a very strong worldwide sales team in North America's largest distribution network, and we have a very dedicated team of employees throughout this organization and around the world.

Based on the opportunities we see in the industry, and the strength of our expanding portfolio, we are confident that we can grow our business, producing the results that our shareholders expect.

We'll now open up the call for questions.

Operator?

Ladies and gentlemen, [OPERATOR INSTRUCTIONS].

Our first question is coming from Heath Terry with Credit Suisse First Boston.

Please state your question.

Thanks.

Paul, when you first got into the sports business you talked about operating it at breakeven.

Can you kind of give us an update on where the profitability in that business is now?

Are you still at breakeven and at what point do you anticipate that part of the business reaching profitability?

Thanks, Heath.

I have to go back to that pricing in the value position was just part of a long-term strategy for us to get established in the [score queue.] Today, with the success and the history, and the sales that we've enjoyed, we feel very, very good that we're at a different point in our growth in the sports business.

We did say that we would continue to invest, because we're running on very, very tight margins with the value pricing, invest that money back into advertising and marketing.

As we get visibility on next-gen, then we will see the impact that we can benefit from the higher priced pricing of our products.

Paul, do you have anything to add?

No.

I think, Heath, we indicated this is sort of an investment year for us, and you are correct we have observed that, we didn't really expect much marginally from that line to begin with.

But you've seen our entry with Major League Baseball.

We think the opportunity there is fast, a very long season, and we're excited that, we didn't [miss] this in a very serious way.

And we think for fiscal '06 we'll definitely be demonstrating added growth to the bottom line.

Great.

Thanks.

And also with the growth in the addition of more co-publishing business like your Sid Meier relationship.

Can you talk about what the margin structure behind those titles are and how that differs from your overall publishing business?

Well, I mean when we go into a co-publishing arrangement with a third-party, obviously, each deal has a different flavor, now that the bigger, highly-valued properties come with a little higher price tag, but, again, the volume opportunities are [missed.] So depending on which game we're talking about you'll get the financiers and the internal homegrown products that we can do with internal resources.

But we've signed up a number of properties over the last several months that we think supports the opportunities, call it multi-million-type opportunities by units, and margins that should behave very well either, I think, right in the middle to the better end of our range.

Okay.

And just last, kind of a housekeeping question. 140 titles that you mentioned that are in various stages of development, how many of those are internally developed titles versus externally developed?

Heath, it's Cindi.

You know, again, back to the 140, that's total that's in development, in our pipeline we said about 70 this year.

We don't have a list in front of us of the internally developed games, per se, but I would say that probably about a third of those games.

In terms of units and dollars it has a much different impact.

Sure.

If we're looking at SKU count, I would say probably about a third.

Great.

Thank you.

Our next question is coming from John Taylor with Arcadia.

Please state your question.

Hi, I have a couple of questions.

Karl, maybe, could you talk a little bit about the segment gross margin trend between publishing in Jacks?

Are you seeing any changes there?

And kind of how you're thinking about what that's going to look like as you look forward with your quarterly guidance; much change there?

And then on the baseball property, it's probably too early to ask this but I'm going to try.

Could you talk at all about online features and things that you might be able to do since you have that property exclusively?

And then the third question is the increase in capitalized software development costs on the balance sheet, how much of that -- can you tell us how much of that came from CIV, as opposed to some of the other things that are going on?

Thanks.

First question was publishing versus the Jacks gross margin in terms of the mix for the business and the trend for the future.

I mean overall we had 36 percent gross margin for the first quarter.

I think we would certainly expect to be living in that neighborhood for the balance of the year.

Certain quarters are a little higher.

We have some things in mind for PC a little further into the year and other quarters perhaps just a little bit lighter.

But as we've looked at it, we're fairly confident that that's about the number that we'll land at for the entire year.

Underneath that is there any change in either the publishing or the distribution margin that's significant?

No, I think the distribution business, we're very satisfied with the holiday season performance overall.

The margins may not have been at the higher-end of the range that we've had for that business in the last several years.

But as we indicated the hardware, supply certainly constrained it's ability to ship some of the value-related product, which carries some of the better margin.

So overall we're still very happy with the business model there, and we think it will continue to grow into the future.

It's just that this particular holiday season was not as robust as several others.

With regard to the publishing business, depending on which game we're talking about, you know there's a very wide range of margin available within that business, PC can be at the upper-end, and other products depending on the structure of third-party deals can trend low.

But overall, again, we think the weighted average is going to be right in that mid, 30s point.

Okay.

J.T. this is Paul.

It is early for us to disclose our online plans for baseball, but I can tell you that was a very inviting factor of a long-term agreement with MLB.

Baseball is very statistically driven, so we think there's a big opportunity, especially as the next-generation systems take hold and have a lot of connectivity.

Also, while I'm on baseball, we think that the baseball opportunity, not just online has a lot of potential, but also on a worldwide basis in the Japanese and Latin America markets.

And we also think baseball has tremendous potential that can be maximized in the portable business.

The natural hitting/pitching mechanism can make for some great portable products.

And and then your last question, J.T., was with regard to the movement in the cap software.

I would prefer not really to get into a sort of game by game listing of the movement.

Yet you've correctly identified that this balance will now move because we either do a third-party deal, and there's development cost associated with that, that will put that on the books, on that line item.

Also you are going to have to remember that we're building, several releases for Rockstar, including Warriors, the Nightclub 3: DUB Edition, and those numbers are also now contained within that line item.

Let me try it a different way.

I think when the rights to CIV were sold, that number got announced by Atari, so we kind of know what that was out there.

If this game is going to ship short-term it would seem that that wouldn't show up in long-term capitalized?

So it seems like there's other things going into that line.

Well, bear in mind we had a number of [indiscernible] acquisitions during the quarter.

Obviously, studio acquisitions, but we have, acquisitions showing up as well in the intangible line items on the balance sheet.

So rights associated with games versus development costs are going to be viewed somewhat differently.

Okay.

All right.

Thank you.

Thanks, J.T.

Our next question is coming from Tony Gikas with Piper Jaffray.

Please state your question.

Thanks.

Good afternoon, guys.

What are your intentions for pricing of the Grand Theft Auto product for the PSP?

And it sounds like that -- correct me if I'm wrong -- is that a July/August-type of a launch date on that product?

Second question, is there an opportunity -- this goes to the distribution business -- to take the pricing up on the software side of that business?

Have you guys struck any, interesting deals there recently?

Maybe you could update us on the mix of the distribution there, the hardware versus the software currently?

Then I have a follow-up.

Okay, we're very excited about bringing Grand Theft Auto franchise to the PSP, and certainly it will be priced at a premium positioning and that's what the market would expect.

And certainly that brand can command that, and we feel that the game that we're producing will command that premium pricing.

We think that the PSP business, particularly in the Rockstar scenario where there is a slightly older target audience, we just have a lot of potential to bring our brands over.

And you see our support of that indicative with having Midnight Club 3: DUB Edition and Grand Theft Auto being brought to that system.

In the distribution side, we're seeing a lot of deals because of the size of our distribution in the market, and also because of a lot of the programs that we have secured with a lot of the key retailers.

It's really nothing different than in the past, except we continue to, pound the pavement and, look for all the deals and then figure out innovative ways to merchandise and market them.

We think the distribution business with some increased hardware just has a tremendous opportunity with all of this value priced product as we go into the back half of the year, and we remain committed to the distribution business.

Looking at this year, what will the mix of hardware versus software distribution be?

To really address that, you have to get behind those sort of called "launch quantities" of the vendors putting new hardware into the market place and how that plays out with the current generation that we're at the tail end of.

So, it's a good question, Tony, I'm not taking anything away from it.

But you have to make assumptions and we've typically held the hardware portion of the distribution mix anywhere from 10 to 20 percent, depending on where we are.

As you can imagine there's not a whole lot of margin associated with hardware, so we don't really have a lot to gain by shipping a lot of it.

But to the extent that we can play software-related sales at the same time with hardware orders, that's the part that we've always, found to be profitable and intriguing.

So, we're happy to see more hardware action as the year goes on, and pricing of current generation will be interesting to watch, and anything that drives more units is good for Jack.

Okay.

Last couple of quick ones.

Just on a -- going forward basis, how many products on the sports side of the business do you vision the Company publishing on an annual basis?

And then what's your view of, the "take the temperature" of the international markets for us, we don't have as good visibility there as you do?

Not for Take-Two, specifically, I know you guys had a terrific quarter, but how is the European and other pal markets playing out right now?

Well, with sports, you go to your first question.

We are waiting for the final decision from the NBA, but they've given us some indications that we're now in the final negotiations, and they're looking at a long-term nonexclusive contract.

We're still, working with [NCA] College Basketball and Hockey, and then we have announced the third-party exclusive arrangement with Major League Baseball.

Our Indie Built Studio brought us 3 sports brands that we have under plans or are considering to bring into market, and then we'll look to expand so that we have a total sports offering.

World Poker Tour, depending on if you are having strong risks as a sport, could fit into that sports-type category.

So I think when we have tallied up the [John Rouse], Tony, we generally can count something towards roughly a dozen, but it depends on -- everybody has a little [definition] of something like World Poker Tour and some of the other things that are certainly entertainment, sports oriented.

Regarding your question about the international market.

We saw a very, very strong sales of Grand Theft Auto: San Andreas.

The international market being a little bit different than the domestic market with the hardware mix.

And the fact that this year in the domestic market, there were one giant compelling game from us, Grand Theft Auto: San Andreas, followed by a product from Microsoft, and in the European market, the one "must have" title was clearly our title, Grand Theft Auto: San Andreas.

We see that market performing very, very well for us.

And in terms of sports, we think there's a big opportunity internationally, to use our distribution strength with some of the sports product in the international market.

Let me ask a question this way.

Will international markets outperform the U.S. market in calendar '05?

Do you see a little more strength just industry-wide?

I don't know if they'll outperform, but they'll certainly stay neck-and-neck in terms of what your criterias are for performance.

Both markets remain very, very strong.

Okay.

Thanks, guys.

Our next question is coming from Mike Wallace with UBS.

Please state your question.

Hi, a couple of things.

First, I don't know if you addressed this, Karl, but the split between publishing and distribution is that 60/40ish this year?

Mike, it would stay roughly perhaps closer to 70/30.

Okay.

As far as the year goes with a much lower tax rate, first of all, is that just for a couple of quarters or is that something we could look for into next year down at 25 percent, you could talk about that a little bit?

And then the second thing is the intention to grow in fiscal '06, top and bottom line, could you talk about some of the assumptions behind that in terms of, the console market, the handheld market?

Would distribution be up in fiscal '06?

That sort of thing.

First on the tax point, yes, we've looked into the future for, the balance of this year, and trued-up the mix of products that we see within that, and so we're comfortable with that 25 percent range number.

Beyond that you get into mix of business and, launches and things that really drives to your, almost second question.

So I'll just -- I'll hedge on that for the moment, but clearly, we have structurally lined ourselves that to the extent that we sale products and create profits outside the United States that we can achieve, tax rates that are better than where the Company was several years ago.

With regard to the top and bottom line growth for fiscal '06, I mean really when you look at our business, the portfolio that we're driving we have a very successful distribution business to begin with.

That certainly benefits as hardware is put into the market place, drives more consumer traffic, adds the opportunity to sell the value product, as we've experienced even with PlayStation 1 merchandise, running back over the last several years.

So that business should continue to perform quite well.

The mix may shift as you get into perhaps a little heavier hardware orientation with the initial launches of hardware.

Then we have the whole 2K line, the games and the license and franchise opportunities, and you've seen that we've been on a fairly rapid pace over the last several months of acquiring new product to support the 2K lines, including the 2K Sports line.

And then Rockstar, obviously, we've added the development talent and we have a number of titles coming out in the near-term and we would expect -- certainly expect growth and continued diversity from that portion of the business as well.

So when you look at it overall and you realize that we're driving off of 3 sort of growth engines, we feel very strongly that it's reasonable to target growth for next year top and bottom.

And, Mike, with our fiscal year, and a lot of the announcements some of the larger products really have -- will have the impact in '06.

Some of them are PC, so there will be a slightly different margin contribution.

But we think we have a real strong pipeline on the 2K side of the scenario.

And with Rockstar, we have a lot of growth left in San Andreas, we think that the new brands and some of their ability to reach back in their catalog and bring out some of the extensions will take hold in '06.

And Rockstar will use the next-gen to effectively launch some new brands similar to what they did at the last cycle.

And at the same time the PSP can be a tremendous growth driver for us.

That's why we were so excited at the destination PlayStation with the Sony announcement about their commitment to fairly quantities of hardware in the market.

Now, are you assuming a PS2 price cut this year and when you talk about growth in '06 are you assuming the PS3 is out in your fiscal '06?

We are assuming a healthy flow of hardware in the market place, and we believe that the hardware companies will take the steps to keep that flow of hardware in the market.

And we're just assuming some comfort in the PSP number and then we haven't really made any comments.

We'll leave that up to the hardware companies in terms of next-gen.

Okay.

Thanks.

Our next question is coming from Colin Sebastian with Thomas Weisel Partners.

Please state your question.

Hi, a couple of questions.

The R&D spending for the quarter is that roughly the quarterly run rate we should use going forward?

And also in terms of the product SKU count for the year, looks like it went from roughly 60 to 70.

Do you still expect San Andreas to account for 40 percent of sales?

Thanks.

Colin, the R&D I would say in Q1 was a little higher than we would expect to see in the rest of the year.

You had some [in side] compensation in that quarter that you would not expect to see going forward.

So I think you can expect to see R&D trend down a little bit from Q1, through the balance of the year.

And your second question was?

Related to the SKU count.

It looks like there are a few more SKUs in there, and then you had previously, I think, indicated that San Andreas would account for roughly 40 percent of the sales for the year?

Yes, I mean it covers those SKU counts.

There has been some minor tweaking here and there, but in general it's really kind of one track from what we talked about on our Q4 call.

And, yes, in terms of the contribution from San Andreas last quarter we had said we expected it to exceed 40 percent of our publishing revenue and we said it is still in that ballpark at this point.

Okay.

And the 2 unannounced titles from Rockstar.

Are those both under development by Rockstar north?

No, they're under development by Rockstar in its various studios, but we haven't given that information out yet.

Okay.

Great.

Thank you very much.

Thanks.

Our next question is coming from Garrett Edson with Monarch Research.

Please state your question.

Thanks.

Just a couple of questions.

Regarding the World Poker Tour, are there any plans to try to get professional poker players to be put into the game?

For instance, in the TV game, there are no professional players, and I was just curious if there's any plans for that?

Yes, there is the ability as part of that license to bring some players into the game.

Obviously, that can bring a whole different set of features and make the game more exciting.

And some of the settings also can change in the game similar to when they move them around on the TV show.

Okay.

Second question, just regarding Midnight Club 3 pricing for the PSP, should we also assume that is going to be at a premium price point?

Yes, that's the type of brand that commands premium pricing.

Okay.

And final question, just on Reservoir Dogs, what are your hopes for this game?

Are you expecting this to become a premium title for you guys?

We think it has the ability to be in that premium category, but it's a little bit early, you know, a lot of it will depend on the hardware pricing in the market place.

But we have a good relationship with the developer, SCi, and we think it could be a very interesting product for us.

Okay.

Great.

Thank you very much.

Our next question is coming from Elizabeth Osur with Citigroup.

Please state your question.

Thanks.

I just have 2 quick ones.

First, could you remind us when the current NBA contract expires?

We have given out the exact terms of the contract, but we -- based on what happened with the NFL, we went back to all the leagues, and requested long-term type of -- or longer term-type of agreements.

That really is just reflective of the amount of dollars that we put behind these games and the brands.

So we have this year's game out and we look forward to a long-term relationship with the NBA, but we haven't given out specifics.

Okay.

Thanks.

And second question, could you talk about how much of the operating expenses that seem to have been added, whether it's S&A or R&D are going to be ongoing expenses either as a percentage of sales or dollars and how we think about where margins can end up in fiscal '06?

How much of the cost structure?

It seems like a lot of these are recurring items.

Well, Elizabeth, clearly the sales and marketing number, given the volume of the business, was in absolute dollars indicative of a holiday-type period, and a good strong support of the overall business.

The G&A number trended up a little bit from let's say Q4 if you followed it sequentially quarter-over-quarter, and that was principally driven off of professional fees.

And we are addressing Sarbanes-Oxley.

We're using professional help where appropriate to do that, but nonetheless that's going to add a little bit to the burn rate currently.

We would expect G&A to be relatively stable for the balance of the year.

As Cindy mentioned a moment ago, the R&D expense certainly had some, we'll call that a "personnel expense" within Q1 that we would not expect to be on a recurring basis thereafter.

So that number should come down somewhat for the balance of the year.

Okay.

Thanks.

Our next question is coming from Jennifer Jordan with Wells Fargo.

Please state your question.

Yes, good afternoon.

Just to follow-up quickly on Cindi's question about R&D.

You said the personnel expense going forward for the balance of the year should come down slightly.

Does that mean there's more consolidation among the studios that you've acquired or some rationalizing?

No.

In other words the Q1 driver in this case was more incentive complexed, it was pretty well correlated to the holiday season and how the business is done for that point in time.

Okay.

Great.

That answers that.

The next question relates to sort of timing and rollout of some of the new strategies with 2K Sports.

I'm interested in when you look at what it takes to revamp one of the titles so it doesn't include licensing like the NFL title, or to ramp-up a new title as you acquire it.

What is your type of timeline in terms of thinking of that?

Was it all disruptive to getting another game out next year?

No, if you're talking in particular about removing some of the licensed brand that was in there.

It's really not that significant for our guys to.

The Visual Concepts people and the Kush people really drove the product features for the games.

It really goes back to product.

And I don't think that has any significant impact on us.

I know our team is very, very excited.

You know what they are based on the success that they've had, and now very excited about competing in the various sports where we will compete.

And our Major League Baseball license we remain optimistic, extremely optimistic about the opportunity there because it's such a long season, and our agreement with the MLB will really allow us to focus on the length of the season, and then the expansion of the markets internationally, and also in the portable area.

And do you see where the entrance of UV soft in the industry and Microsoft picking up some other sports-related things or other people that there is -- that that expansion of the number of parties might be bidding is going to continue to drive up the license fees?

We've always said when we entered sports that we welcome the competition and that competition in the entertainment technology business is good.

It really elevates the product to the next level.

So we do welcome the competition, but at the same time we're pretty confident that we'll compete very effectively in the market.

And, again, it starts with great games.

We can only complement the Visual Concepts and the Kush guys to the highest degree based on the quality of their product.

And that clearly came out this year with the rankings and all the reviews of the products that they ship.

And you mentioned in your comments that the NBA is looking at a nonexclusive deal.

You don't have any sense that that might change at this point?

No.

We've had a lot of conversations with the NBA, obviously, to make that statement and they have a different market, and they look very favorably on the nonexclusive positioning of products in the market place that helps them grow their category of business.

Great.

Thank you.

Our next question is coming from Mark Argento with ThinkEquity Partners.

Please state your question.

Good afternoon.

A few things.

Could you, (A), I kind of probably already know the answer but I thought I would ask it anyway.

SEC, I know you took a charge last quarter and update there?

And then could you just talk a little bit, I know you guys have been, of course, active acquiring studios.

Could you just kind of compare and contrast where you are right now in terms of internal development capability versus where you were just even a year ago, and then just kind of last cycle?

And then of those 140 games, I know you identified about a third of the SKUs are coming from in-house, but could you talk a little bit more about of those 140 SKUs, how many of those are on next-gen platforms, including the PSP; if you could?

Okay.

Mark, in terms of your question about any update on the SEC investigation, no, we don't have an update at this point.

Of course, if there is an update, we would definitely provide an update.

Your question regarding the SKUs, in terms of 140 SKUs and where they are in terms of next-gen.

We certainly are way at the curve in terms of development for next-gen.

We're working closely with their development studios, both internally and externally.

We're working closely with the hardware companies.

But it's a little early to kind of talk in too much detail about how many of the SKUs are for next-gen, but we certainly are prepared for -- are going to be prepared for the launches and expect to be at or near launch in a big way for all the platforms.

Going back to your question about this cycle versus how we entered this cycle, we had probably less than 100 people in product development.

The Rockstar brand certainly was was known, but not at the level that it is today based on the success that it has had in this cycle.

Today, with some visibility on next-gen, although there's a tremendous amount of growth left in the business of the platforms that are out in the market today, we're excited.

We have over 1,000 people in product development and we have a great catalog of brands that we can extend and sequel.

And at the same time, particularly from our Rockstar guys, we have the ability to create new brands.

And we look to, especially the early part of any transition period to establish some new brands when you have that hard core gamer really driving the business.

So we're in a completely different standpoint and it's one of the reasons why I'm so excited to be part of Take-Two.

I joined 5 years ago when the Company wasn't a Top 10, it probably was just barely making the Top 20 Publisher.

And today we rank behind one person as the largest publisher in the business.

Great.

Just 2 quick follow-ups.

In terms of what you are doing now that you have [indiscernible]?

You're actually a real mass publisher now.

What do you do in terms of professionalizing the development process given that you are now 100 -- excuse me, 1,000-plus strong in that department?

And then also in terms of -- I know some of your competitors talked about wireless being early.

What are you guys thinking about or doing in that area?

Is that an area that you are paying much attention to right now?

And going forward what's your outlook there?

And then I'm done, thanks.

Okay.

First, I'll just say that we are with the increase in our studio size, we are taking great pains to manage the different tool sets and technologies that we have in some of our studios.

We have technology groups that work with the other studios, so we are making that a very important part of the product development cycle as we go forward.

And I think, Mark, we're recognized in the business as certainly processing one of the most creative development houses in terms of new intellectual properties conceived from scratch.

And we're very careful as we blend in new studio acquisitions that they fit generally within that frame work.

And you want to really capitalize off of each of their unique strengths.

So it's not about homogenizing the development process.

You would run the risk of perhaps watering down the results.

But certainly professionally managing them, setting expectations for the future, those types of "call management" tool sets are certainly deployed.

And then with regard to wireless.

We think content is king.

We've been studying the market.

We don't feel that we're at any disadvantage based on our content.

That we will be looking at that market very, very hard and continue to look at it as opportunities to maximize the brands that we have and leverage our content.

Thank you.

Operator, we'll take 1 more question.

Our next question is coming from Shawn Milne with Friedman Billings Ramsey.

Please state your question.

Thanks.

Good afternoon.

A couple of questions.

First on the -- just on fiscal '05, you talked about the percentage of GTA hadn't changed.

But, Karl, it does look like you pushed up your publishing distribution mix a little bit, so overall GTA would be a bigger percent of revenue; is that correct?

No.

In other words, I think we're comfortable holding the GTA contribution overall fairly steady.

What you're seeing is further development in the back half of the year of additional publishing product that we've changed our estimates for a little bit, and that's why we're holding it to the 70/30.

Okay.

On the bottom line, I think it was asked before, but it looks like the tax benefit was about $0.12 in the quarter, maybe $0.20 on a full-year.

Is it just reflecting that you have taken the bottom end of the range up, just continued investment in the business?

Because it doesn't seem like there's more flow through in the year where you got your biggest GTA percentage.

I just wanted to get a little more color on that?

In a year where we're demonstrating year-over-year growth of 31 to 38 percent off that bottom line, and you're absolutely right the tax rate is certainly beneficial in terms of the overall performance of the business.

But that has been my design and careful structuring of how we run our business.

We're very pleased with the overall results for this year, and still targeting growth for next year.

And what that really further drives home is that we are seeing a lot of strength in that international market place when you look at that tax rate.

Okay.

And just on fiscal '06, obviously, there's going to be a lot of give-and-take on this before we get there.

But there are, just at the 30,000 foot level, there are many hurdles if you think about growing that topline and bottom line, especially given the strength, of course, of Grand Theft Auto not being in the NFL -- well, perhaps being in the NFL business with 2K.

But certainly at a disadvantage status tax rate moving the other way.

It just seems like a bit of a bold comment at this point in the year.

Any comments back?

We've thought very carefully about that statement.

We've looked at the diversity within our portfolio.

We've had a 2K strategy that was nonexistence in here about 9 months ago.

We have since really achieved, I think, a number of significant milestones, even within that business line in terms of getting the portfolio together, diversified with sports, licensed properties, and other properties that appeal to a wide segment of the audience.

We're coming off of a huge installed-base of current generation product that will continue to sell into the future.

So when we look at the variables involved and when we break it down into what our internal capabilities are and external relationships that we've developed, we think there is enough within the overall portfolio to make that type of statement.

We also believe that in '06 you'll see the full impact of our sports business, as well as the impact of a lot of the high-profile licensing partnership deals that we've done.

So we feel very, very positive about PSP, particularly from the Rockstar scenario where we can extend that content to PSP.

So at where we stand today we feel very good about '06.

Okay.

Great.

We'll see.

Thank you.

Thank you, Shawn.

Thank you ladies and gentlemen for joining us told.

If you have any follow-up questions feel free to give us a call.

And we look forward to speaking with you on our next conference call.

Thank you.