Take-Two Interactive Software Inc (TTWO) 2008 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Take-Two Interactive first quarter 2008 results.

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

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

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

Is now my pleasure to introduce your host, Ms.

Lee Buckwalter, Executive Vice President for Take-Two Interactive.

Thank you, Ms.

Buckwalter, you may begin.

Thank you.

Welcome, and thank you all for joining us for today's call.

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 and assumptions made by our management 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, including the risks related to Electronic Arts' unsolicited acquisition proposal.

These important factors are described in our filings with the SEC including our 10_k for the fiscal year ended October 31, 2007 and o ur 10-Q for the first quarter ended January 31, 2008 which we are filing today.

These filings may be obtained from our website at www.take2games.com, or by contacting the SEC.

Today's one-hour call will be led by Strauss Zelnick, Chairman of Take-Two; Ben Feder, our CEO; and Lainie Goldstein, our CFO.

We are also joined by Seth Krauss, our Chief Legal Counsel.

The entire team will be available to answer questions you may have during the Q & A session following our prepared remarks.

Now let me turn the call over to Strauss.

Thanks, Cindi, and good afternoon, everyone.

Thanks for joining us.

Before we review Take-Two's results for the first quarter, I want to take this opportunity to offer our perspective on Electronic Arts' unsolicited $26 per share proposal to acquire our Company.

While we have no new information today beyond our prior public statements and filings, we feel it's important to reiterate the position of our board of directors.

That position simply is that EA's proposal undervalued the Company and wasn't in the best interests of Take-Two's stockholders.

In addition, while our board expressed a willingness to discuss the matter with Electronic Arts after the release of Grand Theft Auto IV in April, they refused.

To be more specific, the EA proposal failed to value fully Take-Two's extensive portfolio of top selling brands and our extraordinary creative and human assets.

It ignored the tremendous operational progress we've made in the past year and our solid plan going forward.

It was substantially lower than the values afforded comparable companies and creative assets by Electronic Arts and by the market as a whole.

And it failed to compensate Take-Two shareholders for any of the synergies EA would receive from the business compilation.

I think it's worthwhile to spend a moment to consider these points since they bear on our discussion today.

Any review of Take-Two's value has to start with our interactive entertainment franchises and the extraordinary creative teams who bring them to consumers and delight consumers.

We have one of the highest quality product lines in the industry according to meta critic rankings.

Our franchises are some of the most popular, durable and valuable brands in the business.

And we think those brands will only grow in value as the current console cycle reaches its full potential over the coming years.

A chief source of value is our Grand Theft Auto franchise, it's sold over 66 million units to date.

It's not only Take-Two's biggest hit, it's the industry's biggest hit.

The release of Grand Theft Auto IV is now about seven weeks away and anticipation is running high, both in terms of the game play experience that's expected and the revenue and profit potential.

We're highly confident that Grand Theft Auto IV will exceed the expectations of even the game's most devoted fans and it will set a new milestone for this incredibly valuable franchise.

In addition to Grand Theft Auto, our uniquely valuable franchises include over 20 other brands that have sold over a million units each.

More than half of these are internally owned and developed and we believe our proprietary intellectual property is among the best in the industry.

To cite just a few examples, among our established franchises Midnight Club has sold over 11.5 million units, Max Payne over 7 million units, Civilization over 8 million units, Mafia over 2 million units.

And the initial versions, the first releases of our newer franchises have also performed extremely well.

This is just the beginning for BioShock which has sold over 2 million units.

Red Dead, Manhunt and Bully over 1.5 million units each, and Carnival games over a million units and selling well.

Our sports franchises have been highly successful and we're really proud of how sports is doing, the NBA 2K franchise nearly 6 million units.

The MLB 2K franchise approaching 5 million units.

As long-term followers of Take-Two know, we began a significant revitalization effort early in 2007 and even though it's just a short time later, we've already begun to see significant and positive impact on our effectiveness and our productivity.

To highlight just a few of the areas in which we've made enormous strides: We implemented a more streamlined and efficient operating structure, including $25 million in annual cost efficiencies.

You're seeing the benefit of those now.

We instituted a disciplined product investment review process.

We restructured our international operations to create a more efficient and responsive global sales and marketing organization.

We consolidated 2K Games and 2K Sports on the West Coast to increase the efficiency and better support the growth of these labels.

We sold the non-core joy tech business.

We secured a $140 million line of credit in a challenging lending market, and we've made significant progress in resolving legacy, legal and regulatory issues.

The fact is, Take-Two is a profoundly different and stronger Company today as a result of these initiatives.

We're poised to reap the benefits of these actions in the near and long term.

To summarize, the entire team at Take-Two is working hard to enhance the value of our business through our extraordinary creative talent, our irreplaceable intellectual property, and our ongoing operational improvements.

Our board recognizes its responsibility to manage the Company in accordance with the best interests of our stockholders and I'd like to emphasize that we'll continue to do so.

Now, Ben will review some of the highlights of the first quarter and will provide our outlook for the remainder of 2008 and some insight into 2009.

Ben?

Thank, Strauss.

We're extremely pleased that once again we outperformed our expectations.

Net revenue was over $240 million beating the upper end of our guidance.

On a non-GAAP basis, the net loss per share was negative $0.41 and exceeded the most optimistic end of our range by $0.09.

As a result of the positive first quarter developments and our strong pipeline, we are raising our fiscal 2008 guidance today.

Lainie will detail our guidance and review our first quarter performance later in the call, but I'd like to make a few observations.

With no major new release during Q1, the majority of our revenue came from our strong catalog.

We benefited from the sales of three internally owned and internally developed titles, namely BioShock, Carnival Games and Manhunt 2.

Grand Theft Auto was also a significant contributor both from catalog sales of various GTA titles and from the release in Japan of Grand Theft Auto Vice City Stories on PS2 and PSP.

NBA 2K8 was also a key contributor in the quarter and significantly outranked the competing product and outsold the competition on Next Gen platforms.

The performance of these catalog titles underscores the significant value of our internally owned IP, which we believe is among the strongest in the business, and our ability to leverage that IP through sequels and product extensions.

Our distribution business rose in Q1, led by strong demand for Next Gen software and hardware.

From a cost standpoint, we realized meaningfully lower G&A expenses on a non-GAAP basis compared to both Q1 last year and our fourth quarter.

This reflects the continuing positive impact of our revitalization and our cost reduction initiatives.

Our pipeline for fiscal 2008 clearly demonstrates the strength of our IP and the diversity of our product range.

For example, last month, 2K Play our new label targeting the family game segment released Go Diego Go, Safari Rescue for Wii and PS2, and Dora the Explorer, Dora Saves the Mermaids also on PS2.

Last week, Rockstar shipped Bully Scholarship Edition for Xbox 360 and Wii.

The title has been very well received by the game press.

And 2K Sports released Major League Baseball 2K8 on multiple platforms simultaneously.

For the remainder of fiscal 2008, our lineup is one of the strongest in the industry.

It provides significant revenue visibility, a strong pipeline of proven brands as well as several new titles.

In addition to the eagerly awaited Grand Theft Auto IV, our lineup includes Midnight Club, Los Angeles, episodic content for Grand Theft Auto on Xbox 360, Sid Meier's Civilization Revolution, Top Spin 3, Don King Presents Prize Fighter, Carnival Games for DS and as we announced today, Carnival Games, Mini-Golf exclusively for the Wii, and our complete sports lineup.

The anticipation for Grand Theft Auto IV is rapidly building.

The product previews reflect the phenomenal game play, huge open world environments, irreverent humor and an incredible soundtrack that the series is known for.

Unlike any previous Grand Theft Auto game, Grand Theft Auto will include a multiplayer feature that promises to make this GTA experience the best and longest lasting that the series has ever known.

We've received significant preorders from retailer that are better than expected and we expect a very strong worldwide launch on April 29.

We're also excited about the customer and retailer feedback for Midnight Club, Los Angeles, which we're shipping in Q4.

We recently returned from the destination PlayStation industry event and the response from retail was fantastic.

Consistent with our strategy, we have continued to strengthen our portfolio of brands and acquired the Illusion Softworks Studio in January.

Illusion is based in the Czech Republic and has been renamed 2K Czech.

They are the creator and owner of several hit franchises including Mafia, which sold over 2 million units in its first installment, as well as Hidden & Dangerous and Vietcong.

2K Czech is working on Mafia 2 for fiscal 2009.

While we previously published this title on a third party basis, we now will have the advantage of owning this IP.

The Illusion acquisition brings us further scale not only in terms of valuable properties, but also extends our global pool of industry leading creative talent to a new region.

This studio has approximately 160 developers.

Our fiscal 2009 pipeline is shaping up nicely and will be another strong year for Take-Two.

In addition to Mafia 2, we have additional episodic content for Grand Theft Auto for Xbox 360, sequels to some of Rockstar's AAA titles, our complete sports lineup and several new brands.

We are very pleased to announce today BioShock 2, the sequel to our wholly owned and internally developed title from 2K that has sold over 2 million units since its launch in August.

The title is being developed by 2K Marin and is planned for the fourth quarter of fiscal 2009.

We also announced today that we will be releasing Borderlands in fiscal 2009.

We think the timing of this highly anticipated game provides a better balance among our AAA titles and further strengthens our fiscal 2009 release schedule.

I'll conclude by reiterating the points made earlier regarding the value of our creative portfolio, global talent base, and increasingly efficient organizational structure.

Take-Two is strongly positioned to benefit from the positive trends in our industry.

We'll continue to work to transform our strength into increasing value for shareholders, and we're intently focused on making Take-Two the most creative, the most innovative and the most efficient Company in our industry.

Now I'll turn the call over to Lainie.

Thanks, Ben, and good afternoon, everyone.

I'll be covering several topics today.

First a review of first quarter results, second our outlook for fiscal 2008, and third our guidance for the second quarter.

Let's look at our Q1 results.

Net revenue was $240 million compared with $277 million a year ago.

Non-GAAP net loss was $30.3 million compared to a non-GAAP net loss of $10.3 million last year, with a loss per share of $0.41 compared to a loss of $0.14 last year.

Please see today's press release for a reconciliation of our non-GAAP to GAAP numbers.

We are pleased we exceeded our guidance for a third quarter in a row.

Sales of Carnival Games surpassed our expectations as did our catalog sales.

Jack of All Games' top line performance was also better than expected.

Our GAAP results for the first quarter were a net loss of approximately $38 million or $0.52 per share, compared with the loss of $21.5 million or $0.30 per share in the first quarter of 2007.

Our GAAP results included $6.1 million in stock-based compensation expense and a total of $1.7 million in business reorganization costs and expenses related to unusual legal matters.

As expected, our decline in revenue year-over-year was due to a decrease in publishing sales as we had fewer new releases this quarter compared to the prior year.

Our leading titles in Q1 were Carnival Games, NBA 2K8, BioShock and GTA catalog title.

Our sports business was once again a strong contributor to revenue, representing about 26% of our publishing revenue.

Jack of All Games business also grew, led by strong Next Gen hardware and software sales.

In looking at out consolidated results, our non-GAAP gross margin for the quarter was 22.9%, compared to 26.6% last year.

The decrease in our gross margin compared to last year is primarily due to our revenue mix.

Distribution was a greater percentage of revenue compared to Q1 of last year, and the significant percentage of our publishing revenue was comprised of catalog titles instead of major new releases.

In addition, gross margins were slightly lower than we expected as a result of approximately $5.9 million of accelerated amortization of capitalized software and licenses due to reduced sales expectations for certain titles.

A split between North America and international revenue was 84% to 16% in Q1.

Our sports and distribution businesses skew these numbers relative to our peers, because these businesses are primarily North American based.

If you back out sports and distribution and look at this number for the last 12 months our North America international revenue split was about 60% to 40% compared to about 56% to 44% for the same 12-month period a year ago.

Non-GAAP operating expenses in the first quarter were approximately $80.5 million, down from last year's first quarter.

G & A expenses accounted for the largest reduction year-over-year, mainly due to our cost savings initiatives.

Sales and marketing expenses decreased as a result of lower advertising spend as we had fewer new releases.

These reductions were somewhat offset by an increase in R&D expense resulting from continued investment of our studios and the acquisition of Illusion Softworks.

We're not showing any tax benefit on our losses.

As we said on previous calls, due to our domestic cumulative losses for the past three years, we are required to record evaluation allowance to reduce our deferred tax assets.

We had a provision for taxes in the first quarter, because we were a taxpayer in some of our international territories.

I'd like to highlight a few areas of our performance.

We have shipped over 1 million units of Carnival Games.

U.S.

sales of NBA 2K8 for Playstation 3 and 360 combined have outsold sales of NBA Live for those platforms, according to NPD.

Our strong catalog sales further prove the significant value of our internally owned brand.

Moving on to our balance sheet at the end of Q1, we had approximately $54 million in cash, and $36 million of borrowings on our credit line.

Based on our forecasted cash needs, we expect to draw down in the line further in Q2 and then we will begin to generate cash in Q3 following the release of Grand Theft Auto IV.

Our accounts receivable reserve was about $53 million at the end of the quarter, which represented approximately 46% of gross receivables.

Inventories at the end of the quarter were approximately $82 million, which is comparable to Q1 of last year.

The increase in our software development costs and licenses is primarily related to the key titles planned for release over the next 12 to 18 months.

This includes Grand Theft Auto IV, Midnight Club Los Angeles, Civilization Revolution, and Borderlands.

We currently have approximately 35 titles in various stages of development.

Now to our outlook for fiscal 2008.

We are raising the guidance that we previously provided in December.

We now expect $1.25 billion to $1.4 billion in revenue, and $1.35 to $1.55 per share on a non-GAAP basis.

The key assumptions underlying that guidance were provided in our Q3 conference call on September 10 and those assumptions are still valid today with one exception.

R&D expense will increase by approximately 30% over the prior year compared to our previous estimate of a 25% increase, primarily due to the acquisition of Illusion Softworks and the continued investment in our development studios.

The key factors in raising our fiscal 2008 guidance are our Q1 results exceeded our forecast, and the preorders and initial gamer feedback on Grand Theft Auto IV has been even better than expected.

These factors were slightly offset by our decision to release Borderlands next year to further strengthen our release schedule for fiscal 2008.

Also, Midnight Club Los Angeles was initially planned for release this spring.

We moved the title to the fourth quarter to leverage the retail strength leading into the key holiday selling season, and in order to provide some distance from the release of Grand Theft Auto IV.

We're issuing guidance today for the 2008 second quarter.

We expect non-GAAP income per share in the range of $1.00 to $1.10 and $450 million to $500 million in revenue.

This excludes stock-based compensation expense of $0.16 per share and reorganization costs and expenses related to unusual legal matters of $0.04 per share.

Let me discuss some additional data points on our Q2 outlook.

We expect our revenue mix to be heavily towards publishing for the release of Grand Theft Auto IV.

This should result in increased gross profit margins of about 38%, compared to 25% in Q2 of last year.

For the full year, we continue to expect gross margins of approximately 35%.

We expect overall operating expenses to trend up in Q2 as compared to Q1, primarily driven by higher marketing expense for the release of Grand Theft Auto IV.

In addition, G&A expense will increase slightly from Q1due to a foreign exchange gain in that quarter.

As for taxes, we expect to show a provision for taxes in Q2 for international business only.

While we're not yet providing guidance for Q3 and Q4, I can provide some color on the expected timing of the remainder of our fiscal 2008 titles that we have announced.

For Q3, our key releases are Sid Meier's Civilization Revolution, Top Spin 3, Don King Presents Prize Fighter, and Carnival Games on the DS.

For Q4, our key releases are Midnight Club Los Angeles, NBA 2K9, NHL 2K9, Carnival Games Mini-Golf for the Wii, and Grand Theft Auto IV, Episodic Content.

While it's early to give guidance for fiscal 2009, we'd like to provide some color on the year.

We are building a robust lineup that will include sequels to some of Rockstar's AAA brands and additional episodic content for Grand Theft Auto IV on Xbox 360.

2K games key AAA titles will include Borderlands, Mafia 2 and BioShock 2.

2K Play will publish additional Nick Junior titles under their agreement with Nickelodeon, and rounding out our lineup will be our recurring sports business.

We also expect to leverage the growing opportunities in emerging markets and will expand our downloadable content business as well as other ancillary revenue streams.

Fiscal 2009 will also reflect the first full year of our cost savings initiatives.

We're very optimistic about our future and the opportunities to further build shareholder value.

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

Thanks, Lainie.

I think you'll all understand our great confidence in the value being created at Take-Two by our exceptionally talented people, our industry leading franchises, and our successful revitalization efforts.

We'll continue to manage the Company for the benefit of our stockholders, and we're highly optimistic about our future.

We'll now take any questions you may have.

Operator?

Operator?

Thank you.

Ladies and gentlemen, we will now be conducting a question-and-answer session.

(OPERATOR INSTRUCTIONS) One moment, please, while we poll for questions.

Our first question comes from the line of Heath Terry with Credit Suisse.

Great.

Thank you.

I guess one kind of housekeeping issue, the $5 million in accelerated depreciation, can you let us know what titles that was driven off of?

And then, Lainie, as you were talking about the key titles for '09, it was kind of noticeable that there were no Rockstar titles that were mentioned there.

I guess if you guys can talk about how you plan on managing Rockstar's pipeline?

We have two Rockstar titles coming out this year.

Is that generally going to be the run rate that we would expect and then -- now that GTA is done, if you can give us an idea of what your goal is in terms of the next iteration of that title?

Heath, the acceleration of the amortization, we don't share those specific titles when we do that, but we do look at the projected sales of certain titles and that's how the acceleration happens by title based on the projected future sales of those titles.

And, Heath, he's apropos of kind of the run rate for Rockstar, I wouldn't draw that conclusion, we actually said that we would -- there would be at least one title coming out of Rockstar.

One major AAA title coming out of Rockstar, one major AAA title sequel coming out of Rockstar in 2009.

But that's the only one, we should only expect one?

That's the only one we're announcing today.

Okay.

Thanks.

Thank you.

Our next question comes from Ben Schacter with UBS Securities.

Hi, guys.

I just want to go over a few things, one, now that the game is basically done, should we expect any meaningful differences in how it plays on PS3 versus Xbox 360?

Also, I notice there's no football here.

That -- are you out of the football business?

And then I believe in one of the footnotes here it talks about 2 million options going to Zelnick Media, I was wondering if that had already been announced or where that was going?

Ben, in terms of PS3 versus 360, the games will be identical with the exception of, if there is, a -- if there are differences on the platforms, you may see some of that.

So for example there is a slightly warmer color pallet on the PS3, but beyond that they will be identical games, and the exclusive content on Xbox 360.

The periodic content after if the game is released.

So that's kind of -- that's Xbox 360.

Strauss, you want to talk about the Zelnick Media?

Yes, I'm not sure I understand your question, there's no new option grants.

You may be referring to our initial management agreement, had roughly 2 million, just a hair over 2 million shares of options granted.

Invested over a period of time that's more, that's about a year old.

Okay, and then football?

On football, we're looking at, we took it out -- it's not on the schedule today, but we're continuing to evaluate our options there.

Great, thanks.

Thank you.

Our next question comes from the line of Daniel Ernst with Hudson Square Research.

Yes, good evening, thanks for taking the call.

First question on the ongoing restructuring efforts, obviously, you have hit some of the low hanging fruit in taking cost out of the business, and I was wondering if you think there's any additional head room to remove costs from the operations and/or perhaps there are certain products at your studios that are still a drag to P&L that may be trying to break even or perhaps just cut out altogether?

Looking at the going-forward operating model.

And then another question on the potential lineup, anything to read out of the recent news of Max Payne film production, any insight into when that may be a game again?

Thanks.

Yes, on the costs, just to be clear, we've done our restructuring, and we think we have a very lean and efficient organization.

That said, we stated a willingness and interest and an ability to continue to drive efficiencies, and those will be driven really through a third party vendor costs and outside costs.

This is a growth business.

We think we have the best people in the business and the best intellectual property in the business, and we've stated a desire to grow our business, and so no, quite the opposite.

There is no drag with the studios, we have the right studios, we now have them in the right places and if we could continue to hire the quality of people that we've been able to attract to and keep at this Company, we'd be very interested in hiring more of them.

And I think you should expect to see opportunities like that in the future.

And sports is near or approaching break even?

We are in the same position in sports that we were before, which is to say we expected it to be a contributor this year, and we feel good about the way sports is performing.

You think sports could be a contributor to earnings in this coming fiscal year, or this fiscal year now?

Yes, we've said in a before, and that's still the case.

Great.

Max Payne?

In terms of Max Payne, what's the word, we will sell no wine before its time.

A little early to comment on any particular title.

But we have a lot of interesting things going on.

Okay.

Thanks a lot.

Thank you.

Our next question comes from the line of John Taylor with Arcadia Investment Corporation.

Hi, I have a couple things as well.

I wonder, on the balance sheet you have an income tax payable line of $28 million at the end of the quarter and it doesn't look like that was the case in October.

What -- can you explain what that's related to?

Sure, [J.T.], that's a reclassification due to our adoption of FIN 48 during the quarter, so we were forced to reclassify our reserves for our uncertain tax position, and move it to a long term, so it's out of our incurred expenses and it's in an income tax payable in the long-term asset section.

Okay, is that subject to future performance or anything, or is that a real payable at this point?

No, it's an income tax reserve.

Okay.

And primarily related to international?

Not necessarily.

It's overall reserves on the overall business.

Okay.

So -- but at the same time you have some NOL's in the U.S., it's probably a pretty significant number right now?

Yes, that's true.

Can you give us what that is?

We don't share the specific NOL number, but you've seen our losses over the last couple years, so it's significant.

Okay.

We're currently still not a U.S.

taxpayer, and we don't plan to be next year either.

Right.

Okay, and then could you quantify the catalog -- was it like all of the sales?

I don't remember if you had anything fresh in the first quarter?

We did, we had College Hoops ship during the first quarter and we had Dora the Explorer and Go, Diego, Go!

ship and we also had the reorders from BioShock and Carnival Games was a huge hit this quarter for us.

Right.

So the catalog as a percent of published revenue was exactly what?

Or pretty close to what?

Percentagewise maybe?

About 44%.

44%.

Of published?

Of publishing, yes.

Okay.

Great, and then when you report your numbers in the second quarter, it looks like we're going to have some profitability.

What's the full dilution count going to look like when that happens?

It's going to be about 75 million shares.

Okay.

Great, and then there's been some press coverage of a severance plan being discussed or put into place in case of a change of control.

I wonder if you could tell us how many people that's likely to cover and what the annual cost of that group of salaries would total?

I'll answer the first part.

The senior management was already covered by employment agreements in prior plans and the [share forum] employees were also covered by prior plans, so this represents about 10% of the work force, we're not discussing an actual number.

The plan, by the way, is relatively typical for the industry and relatively typical among our direct competitors.

Right.

Okay.

And so I assume you qualify for that by length of service kind of thing?

Is that triggered by length of service with the Company or is it a salary -- what's the cutoff, how do you determine that 10%.

I think what Strauss is referring to is that the plan covers the entire Company.

There are different tiers that we've outlined and the tier 4 tier which is the lowest tier on the pyramid is dependent on the number of years of service contributed to the Company, and your severance depends on that.

Senior executives, a lot of senior executives are already covered under contracts and I think that's what Strauss was referring to.

Yes, I was referring to the incremental costs of the plan, sorry about that.

And then the overall cost, obviously, depends on -- in the event of a change in control.

In the event certain things happen, it's hard to -- you can model it out, but there's no absolute number that I can give you today.

Yes, okay.

And then let me see, the -- do you guys have a date, or can you confirm that GTA IV has gone gold at this point?

We are confirming our release date of April 29.

When do you expect -- or has it gone gold yet?

J.T., we don't release that information.

Okay, all right, and then my last question, actually, I have two more housekeeping.

One, could you give us the inventory breakdown between publishing and distribution at the end of the quarter?

Sure.

The mix is 65% distribution and 35% publishing.

Okay, great.

It looks like you're combining capitalized development and license costs, I wonder if you could break those out for us, current and long term?

J.T., we don't have -- if you want, you can follow-up with Lainie afterwards.

Okay.

Great, thank you.

Thank you.

Our next question comes from the line of Mike Hickey with Janco Partners.

Hey, guys.

Thanks for taking my question.

Congrats on the quarter.

Curious on 2K Marin.

I thought that studio was created for original IP and why BioShock is moving to 2K Marin.

And what is [Ken Ito], is he still attached to that name, and then if 2K Boston and Australia are not working on BioShock 2, obviously, we have heard they're working on a different game.

Is that something we can model in the next year?

Ken is a terrific asset in the Company.

And he's a brilliant game developer, we're really excited to have him.

He will be working on BioShock 2 and he will be working on a new IP.

A lot of work will be done at 2K Marin, but it's not to say that Ken is not involved.

We think he is critical to BioShock and he's critical to new IP in the Company.

Okay.

And then 2K Boston and Australia, they're working on one game then with a little bit of time spent in BioShock 2, or?

Yes, they're working on another game.

Okay.

And then you said that, I think you said preorders for GTA IV were a little bit elevated relative to your original expectations, is there a catalyst in your view for that?

Look, it's getting a lot of publicity.

I couldn't tell you what the catalyst was, we kind of see it.

We see it from preorders just on the numbers.

Obviously, the platforms are selling great.

They seem to be resistant to any downward pressure in the market overall.

And, I think consumers will probably tell you that they're nervous there's not going to be enough when it comes out, but we're doing everything we can to get the game out.

It's a great game.

We think it's getting a lot of great publicity and we think it's selling better than expected.

When you guys modeled for your preorders, was is that that -- did you kind of index that against prior GTA releases and the preorders there, or was that something different?

We did a lot of modeling around here, we take it from a lot of different angles, we -- Lainie and her team are fairly sophisticated when it comes to this stuff, so we -- there's obviously, when you're in a hit-based business, there's always a range of outcomes you expect.

And when you have early data, a lot of the ultimate data depends on what the early data is.

The early data is positive, and as a result, we think the ultimate data will be positive.

Okay.

The last question on your release date for GTA IV, April 29.

I can't think of any other video games that would compete there.

But certainly on the cinema side the start of the box office, summer season, you have at least one [temple] coming out that weekend.

Do you think that that in anyway crimps your initial potential there or --

Not in the least.

I think this is -- this is the title that stands by itself.

When we first moved the title out from Christmas season the feedback we got from the marketplace and from consumers and retail channels, this game stands on its own.

It will withstand any competition either within the video game business or outside the video game business.

Okay.

Thank you, guys.

Thanks.

Thank you.

Our next question comes from the line of Doug Creutz with Cowen and Company.

Thanks.

Briefly, when you guys first came in a year ago, I think one of your parties was trying to negotiate a new contract with a Rockstar, and obviously, that got pushed back due to the GTA IV delay.

Now that that's going to be shipped soon, is that going to be pushed back up to the top of the priority list for you guys, and how does your ability to grow the business in fiscal '09 get impacted by your ability to do or not do a deal with Rockstar?

Thanks.

Thanks for the question.

I begged the question, though, because we have never commented on the internal workings of our discussions with specific employees, and it just would be inappropriate and certainly we wouldn't start today.

We think we have the most talented, creative people in the business, incidentally we think we have the most talented business people in the business as well.

And when we have something to say about our ongoing relationships with certain people, we will do so.

Strauss, on the comment -- on the topic of Rockstar, I wanted to add some information that Mike Hickey asked before, because I'm not sure it came out completely the way it should have, but we are releasing additional episodic content on Grand Theft Auto IV for Xbox 360 and sequels to some of our Rockstar AAA titles and I wanted to make sure you had the correct information.

Just to finish it off.

We value the relationship with Rockstar greatly.

They're creative prowess and ability and commitment, focus and dedication is unmatched in the industry.

You're going to see just one piece of evidence of that on April 29, but that's not the only piece of evidence.

There are a lot of other great games, and then there are a lot of other great games and entertainment coming from the rest of our Company as well.

It's the thing we're most proud of.

But to comment on people's individual relationships with the Company, it's never something we've done and we're not starting now.

Okay.

Thanks.

Thank you.

Our next question comes from the line of Edward Williams with BMO Capital Markets.

Good afternoon.

A couple questions.

First of all, can you give us an idea just to follow on the episodic content of GTA, how we should model that out in terms of the economics around that?

We haven't really discussed pricing, we haven't discussed downloads, we have, I think -- you obviously model what you need to model.

But we haven't disclosed anything, and neither has Microsoft, so I'm afraid I can't provide any new information today.

Okay.

And looking at the head count.

Can you give us an idea as to what the head count is at the studio as well as the overall head count?

The total studio count is about 1,350 people right now, after the acquisition of 2K Czech.

And our total head count is about 2,100 employees.

Okay.

And then as we look at GTA IV what's sort of a -- how should we look at the annual contribution of revenues coming in the second quarter versus the first quarter and the fourth quarter of the fiscal year?

How are you thinking of it this go round?

We haven't really shared our launch quantities yet, and we're giving our guidance for Q2 overall.

But we haven't shared our specific numbers for Q3 and Q4 yet.

I think we have said in the past, when it was a Christmas release, we would have expected a bulk of orders to come in a shorter period of time.

We would expect it to be more extended given that it's not in the Christmas season.

We're also seeing a lot of leverage in our catalog in general.

It's one of the great things about what's going on in the business right now.

Great.

Thank you very much.

Thank you.

Next we have a follow-up question from John Taylor with Arcadia Investment Corporation.

Hi, let's see, I didn't expect to get in that early.

I think Edward asked that question about the economic --

Since you're giving us some guidance that we're going to see revenue from the episodic, I think it will be really helpful if you could give us a couple hints in terms of how that might hit certain line items in the fourth quarter?

I mean, or are you going to book the whole amount that's in the current or is that a 12-month thing?

I mean, can you give us any way of thinking about how that chunk of revenue comes in?

We definitely plan on having one of the episodes during fiscal year 2008 in the fourth quarter and then one in fiscal 2009.

And we're able to recognize the revenue as we meet our obligations.

That's how we're going to recognize the revenue.

So is there capitalized development costs against that that's going to be amortized off?

Yes.

You can't give us any hint, though, in terms of contribution margin or anything like that?

No, we can't.

Okay.

You might think about that because that's clearly going to have a pretty big impact and it would be helpful for us to know how you're thinking about that anyway.

Thanks.

Thanks for the feedback, J.T., we'll consider it.

Thank you.

Next we have a follow-up question from Ben Schacter with UBS Securities.

I'm following up on J.T.'s question on capitalized software, how should we think about how that will decline in Q2 when the game is released?

In Q2, it will match with the revenue as we ship the product.

It's going to be amortized as we recognize the revenue over the life of the product.

Do you have any sense of where you'll end up with capitalized software when you report Q2?

We have it in our overall forecast.

But it's not something that we've shared with the public.

All right.

And specifically on GTA IV.

What percentage of the revenue and units do you think will come from the special editions, the higher price?

It's pretty small.

It's a pretty small amount, but we haven't shared the exact percentage yet.

Okay.

And then the last question.

The music genre has performed exceedingly well.

The history of Rockstar and some of you folks over at Zelnick has been in the music business.

Is that a genre that you anticipate getting into in the video game side of things?

We're a pretty creatively driven shop and the music on GTA is fantastic.

There's music in Midnight Club which is fantastic.

We'll continue to explore that.

I think it adds a terrific game experience to the games, it's an immersive experience, it's an exciting and emotional experience and music is a key part of that.

I don't know that I would call music a genre, it's a part of the total experience, and that's what GTA is, it's one of the best gaming experiences on the planet.

And so we'll continue to explore that, the guys at Rockstar are some of the best in the business at doing that.

The last question on EA.

Just to clarify sort of the timing around this that right now you are not talking with the company, but you've told them that you're willing to talk after release of the game, and that they -- as far as you know, don't want to do that, want to speak now?

Well, no, it's what I said at the beginning of the call.

We've disclosed everything, it's all out there in the public and there's absolutely nothing new to say.

Okay.

Thanks.

Thank you.

There are no further questions.

I'd now like to turn the call back over to Strauss Zelnick.

Thank you so much for joining us today.

As you can imagine, we're feeling pretty good about how things are going, and we feel good about the rest of the year.

Thanks so much for joining us.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.