Take-Two Interactive Software Inc (TTWO) 2008 Q2 法說會逐字稿

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

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

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

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

It is now my pleasure to introduce your host, Ms.

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

Thank you.

Ms.

Buckwalter, you may begin.

Good afternoon.

Thank you all for joining us today.

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

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

Our team will be available to answer your questions during the Q&A session following our prepared remarks.

Before we begin, I'd 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.

We have no obligation to update these forward-looking statements.

Actual operating results may vary significantly from these forward-looking statements based on a variety of factors including the risks related to Electronics Arts' tender offer.

These important factors are described in our filings with the SEC, including our 10-K for the fiscal year ended October 31, 2007, and our 10-Q for the first quarter ended January 31, 2008.

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

Now let me turn the call over to Strauss.

Thanks, Cindi, and good afternoon, everyone.

Thanks for joining us.

We're pleased to report very strong second quarter results that beat both our own guidance and analysts' expectations continuing the trend of the prior three quarters.

Based on our excellent results here today as well as our positive outlook for the balance of fiscal 2008 we've increased our full year guidance for the second time this year.

Our performance clearly demonstrates that Take-Two is creating significant stockholder value primarily through the efforts of our Rockstar and 2K labels who are producing the best interactive entertainment on the market today.

I should note that it's early days yet.

We're only one year into the revitalization of this Company.

We still much more to achieve.

That said, I'm most pleased with the process we're making so far in transforming Take-Two into the most creative, the most innovative and the most efficient Company in our industry.

Clearly, the major factor in our performance this quarter was Grand Theft Auto IV.

While the tremendous consumer, critical and media acclaim for the game speaks for itself, I'd like to take this opportunity to congratulate the entire Rockstar games team on this stunning achievement.

It been widely reported that GTA IV had the largest debut of any entertainment product in history.

Now we always knew GTA IV would be a triumph and its success has blown away not only our own expectations but those of its millions of fans as well.

We've proven our ability to create powerful entertainment franchises whose value extends beyond the traditional interactive entertainment market.

This is illustrated by the deal we announced last month for a BioShock feature film to be produced and directed by Gore Verbinski, director of "Pirates of the Caribbean." Our partnership with top film industry talent speaks volumes about the value we're creating at Take-Two.

The fact is our industry is now a source of entertainment that can equal or surpass both in consumer appeal and economic strength more established media such as film, television, music or books.

This reaffirms our enormous confidence in the future potential of our industry in general and Take-Two in particular.

In addition to the successes on the creative front, Take-Two has also executed on initiatives to expand our development talent and our geographic reach.

Ben is going to take about these in a few moments.

Before I turn the call over to Ben, I'd like to give you a brief update on the Company's efforts to maximize stockholder value.

As you know, at the time of EA's highly conditional unsolicited tender offer, we emphasized the board's commitment to explore all strategic alternatives including remaining independent and pursuing business combinations with third parties.

We said we were willing to begin formal discussions with interested parties on April 30 following the launch of Grand Theft Auto IV and we're actively engaged in that process now.

In fact, we have had and continue to have formal discussions with a number of interested parties.

It wouldn't be appropriate to comment further on the status of our efforts at this time.

Now, Ben will provide an overview of the quarter's results and highlight some of the initiatives we're pursuing to continue to grow the business and realize its exciting potential.

Thanks, Strauss.

We're extremely pleased with our second quarter results.

I'll review some of the financial highlights and then Lainie will provide further detail in a few moments.

Net revenue for the quarter was $540 million, more than double the $205 million we reported in Q2 last year.

Earnings on a non-GAAP basis were $1.52 per share reversing net losses in the year-ago period and the first quarter.

Based on our strong Q2 results and favorable outlook on the balance of the year we are raising our fiscal year 2000 (Sic-see press release) guidance from $1.4 billion to $1.5 billion in revenue and non-GAAP EPS of $1.65 to $1.85.

The Company's cash position has increased from Q1 by approximately $18 million and we've paid down $20 million of our credit line.

Our cash balance will be significantly higher by the end of Q3 as the substantial orders we receive for GTA IV late in the second quarter convert to cash.

We're very proud of our accomplishments in Q2.

I'd like to thank everyone at Rockstar Games as well as the teams at Jack of All Games and the entire Take-Two team, all of whom contributed to this successful launch of GTA IV.

GTA IV's performance in the marketplace has continued to be extremely strong post launch.

As of May 31, we've sold over 11 million units into retail channels worldwide with approximately 8.5 million of those units sold through to consumers.

The game has broad global appeal and is the best selling interactive entertainment title in North America and has broken sales records in Europe.

There's also a cultural phenomenon.

The New York Times, L.A.

Times, Wall Street Journal, Variety, Newsweek and countless other publications have lauded the game's breathtaking technological and artistic achievements.

Even National Public Radio remarked on how much they enjoyed listening to Public Liberty Radio in the game.

On the commercial side, GTA IV earned a Guinness world record for the highest revenue generated by an entertainment product in 24 hours.

And by one account, GTA IV single handedly propped up the U.K.

economy by helping retail sales for April exceeding expectations.

GTA IV should continue to deliver value for Take-Two well into the future.

For example, GTA - San Andreas sold 12 million units in the first four months through January 2005 and went on to sell another nine and a half million units since that time.

This is proof positive of the longevity of the extraordinary franchise track record that we expect to be reflected in the performance of GTA IV.

I'd like to comment on a few other factors that contributed to the stronger than expected results in the second quarter.

We are very, very pleased of the continued strength of Carnival Games and other catalog titles and we're continuing to see the positive impact of our cost reduction initiatives.

I also want to emphasize the actions we've taken during the second quarter to broaden the product portfolio, expand our development resources and extend the reach of our intellectual property into the Asian market.

Each of these initiatives is intended to strengthen our capacity to deliver profitable growth and stockholder value.

Turning for a moment to our product portfolio, Take-Two's pipeline today is the strongest, most diverse and the most exciting in the Company's history.

All of our labels, Rockstar, 2K Games, 2K Play and 2K Sports are producing some of their best and most creative work ever.

We're developing new versions of many of our strongest franchises as well as a number of new brands.

While the fullest of titles in progress is too extensive to mention, I'll highlight a few that are particularly exciting for the summer and fall of fiscal 2008.

Rockstar's lineup for the second half includes Midnight Club Los Angeles for Xbox 360 and PS3 and Midnight Club L.A.

Remix for PSP.

2K Games will release the highly anticipated Sid Meier's Civilization Revolution for Xbox 360, PS3 and DS.

The successful BioShock franchise will be extended with a new version for PS3.

We've sold over 2.2 million units of this blockbuster title on Xbox 360 and PC to date.

Continuing the growth of our casual games business 2K Play will reveal Carnival Games for DS and Carnival Games Mini-Golf for Wii.

Carnival Games for the Wii have sold over one and a half million units so far and this is still going strong -- the title is still going strong in retail.

The DS title is shipping in July and is receiving strong support from Nintendo who is currently offering it on their demo download stations in stores and will they are also be planning to have demos of the title placed on their in-store kiosks.

2K Sports has an extensive roster including Top Spin 3 for PS3, Wii, Xbox 360 and DS, and Don King Presents Prize Fighter for Xbox 360, Wii and DS.

We'll also release MLB Power Pro's 2008 for Wii, PS2 and DS as well as NHL 2K9 and NBA2K9 for multiple platforms.

Let's look for a moment at our fiscal 2009 lineup and we've already announced several of our key titles.

BioShock 2, Mafia 2, Borderlands and we've also announced today that we will release the first installment of episodic content for GTA IV for Xbox 360 in the first quarter of fiscal 2009.

We think the 2009 release of this highly anticipated episode will provide better balance among our top titles and further strengthens our fiscal 2009 release schedule.

We'll have more to say about our 2009 lineup in the coming months.

We've continued to make investments to expand our creative resources and extend our global market presence.

Since we spoke with you in March we enhanced our world class development capabilities by forming Rockstar New England through the acquisition of Mad Doc Software.

The team at Mad Doc is extremely talented and accomplished and most recently worked with Rockstar on Xbox 360 version of the critically acclaimed Bully: Scholarship Edition.

We're also actively targeting opportunities in the fast growing Asian market where we already have a solid foothold thanks to the global popularity of our products.

Recently we named Hubert Larenaudie, formerly of the Electronic Arts and Vivendi Universal Games, to the newly appointed, newly created position of President for Asia.

Hubert will be establishing an office in Singapore as the focal point for our Asia operations.

He has a track record of building leading market positions in South Korea, China, Japan, Taiwan and Southeast Asia and his experienced in growing an online games business will be important to our efforts to build critical mass in the Asia-Pacific region.

We have several priorities in the Asia-Pacific market.

In addition to expanding distribution in the region for our products and developing a strong presence in Japan, we also intend to establish an online game operation with particular focus on China and Korea.

We're confident in Take-Two's ability to achieve growth in Asia and we're proud to have attracted an executive of Hubert's caliber to help leverage the opportunities we have at Take-Two.

I want to thank our employees for remaining focused during what could have been a very distracting time, for developing, marketing and selling great interactive entertainment and driving value for our stockholders.

We're very pleased with Take-Two's strong performance in the first half of 2008.

We're extremely confident in the future of our business.

Take-Two is delivering on the potential that we saw when we joined the Company only a year ago.

We're continuing to invest in great products, expanded creative resources and a global market presence.

I'll like now to turn the call over to Lainie.

Thanks, Ben, and good afternoon, everyone.

I'll be covering several topics today.

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

Let's look at our Q2 results.

Net revenue was $540 million compared with $205 million a year ago.

Non-GAAP net income was $115.4 million compared to a non-GAAP net loss of $29.2 million last year with earnings per share of $1.52 compared to a loss of $0.41last year.

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

We're really pleased that we're exceeding our guidance for a fourth quarter in a row.

Sales of Grand Theft Auto IV surpassed our expectations and was the primary reason for our better than expected performance.

Our GAAP results for the second quarter were net income of approximately $98.2 million, or $1.29 per share compared with a net loss of $51.2 million, or $0.71per share in the second quarter of 2007.

Our GAAP results included $12.4 million in stock-based compensation expense and a total of $4.7 million in expenses related to professional fees and legal expenses related to unusual matters, as well as business reorganization costs.

Professional fees related to the EA tender offer were $3.4 million of the $4.7 million total.

Our leading title in Q2 was Grand Theft Auto IV which launched worldwide on April 29.

Other top titles in the quarter were Major League Baseball 2K8, Bully: Scholarship Edition, Carnival Games and Grand Theft Auto - San Andreas.

Jack of All Games business also grew led by strong current generation hardware software sales, especially the Wii.

In looking at our consolidated results, our non-GAAP gross margin for the quarter was 42.2% compared to 25.1% last year.

This is primarily due to our revenue mix as publishing was 90% of total revenue and our high margin internally owned and developed Grand Theft Auto IV title was a significant percentage of our publishing revenue.

Our split between North America and international revenue was 65% to 35% in Q2.

If you back out Sports in our distribution business and look at this number for the last 12 months, our North America/international revenue split was about 60% to 40% compared to about 55% to 45% for the same 12-month period a year ago.

Non-GAAP operating expenses in the second quarter were approximately $108 million, up from last year's second quarter for the following reasons.

Sales and marketing expenses accounted for the largest increase in operating expenses year-over-year mainly due to the launch of Grand Theft Auto IV and Bully: Scholarship Edition this year.

Also, G&A expenses increased compared to last year due primarily to increased incentive compensation and professional fees and the $3.9 million increase in our provision for bad debt expense.

These increases were somewhat offset by approximately $2 million of cost savings initiatives.

Our tax expense was primarily for our earnings and our international territory.

Moving on to our balance sheet, at the end of Q2 we had approximately $73 million in cash and $60 million of borrowings on our credit line.

Based on our significant GTA IV sales we expect to begin to generate cash this quarter as receivables convert to cash.

Our accounts receivable reserve was about $67 million at the end of the quarter which represented approximately 16% of gross receivables.

Inventories at the end of the quarter were approximately $92 million, up from the same period last year due to the significantly higher business volume.

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

We currently have approximately 33 titles in various stages of development.

Now to our outlook for fiscal 2008.

We are raising the guidance that we previously provided in March to reflect the better than expected performance of Grand Theft Auto IV, partially offset by the move of the first episodic content for GTA IV for Xbox 360 from fiscal 2008 into fiscal 2009.

Additionally, we no longer anticipate reaching profitability in our 2K Sports business in fiscal 2008, and I'll discuss that in more detail in a few minutes.

We now expect $1.4 billion to $1.5 billion in revenue and $1.65 to $1.85 in earnings per share on a non-GAAP basis.

The primary assumptions underlining the guidance are as follows.

We expect the net revenue breakdown in our publishing business to about approximately 70% from Rockstar, 15% from 2K Sports and 15% from 2K Games and 2K Play.

While we had previously expected 2K Sports to turn profitable in fiscal 2008, we are currently forecasting a loss in our Sports business.

We experienced lower tax rates than we expected on the increased installed base of Xbox 360 and PlayStation 3 hardware.

On the expense side, sales and marketing is closely tied to our product releases.

We expect a larger marketing spend in absolute dollars in 2008.

However, sales and marketing expenses should be relatively stable as a percentage of sales.

R&D expense continues to fluctuate from quarter-to-quarter based on the products in development.

On an annual basis, we expect total R&D expenses to increase about 45% primarily due to the acquisition of Illusion Softworks, Mad Doc and continued investment in our development studios.

We're seeing a significant portion of the expected cost reductions in the G&A area, although the annual benefit of our cost savings initiatives won't be realized until fiscal 2009.

Offsetting the cost efficiencies our 2008 G&A levels reflect increased professional fees.

In addition, we'll have higher employee incentive compensation expense based on the Company's strong performance and we established a $4 million reserve for bad debt expense in Q2.

Overall, we see 2008 G&A levels increasing by approximately 7% in absolute dollars compared to 2007.

Depreciation and amortization should increase modestly and based on our current forecast we anticipate our non-GAAP effective tax rate to be about 10% to 12% in fiscal 2008 and for Q3 and Q4 we expect to show a small tax provision primarily for our international business.

We're issuing guidance today for the third and fourth quarters.

For Q3, we expect non-GAAP net income per share in the range of $0.45 to $0.55 on $325 million to $375 million in revenue.

This excludes stock-based compensation expense of $0.17 per share and expenses related to unusual matters and reorganization costs of $0.13 per share.

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

Let me discuss some additional data points on our Q3 outlook.

We expect our revenue mix to remain heavily weighted towards publishing due to the launch of the Q3 titles I mentioned and the continued strength of Grand Theft Auto IV.

While we expect to see continued strong sales of GTA IV in Q3, our gross profit margins will decrease slightly due to the launch of several new 2K titles in Q3.

And for the full year we expect gross margins of approximately 36%.

On a non-GAAP basis, we expect overall operating expenses to trend up slightly in Q3 as compared to Q2 primarily driven by higher marketing expense in the continued support of Grand Theft Auto IV and marketing proceeding the launch of Midnight Club Los Angeles as well as our 2K title.

R&D expense will also increase from Q2 due to the acquisition of Mad Doc, lower capitalization rates following the release of GTA IV and the continued investment in our internal studios.

These increases will be partially offset by a decrease in G&A expense due to the continued implementation of our cost savings initiatives and the bad debt reserve that was set up during Q2.

For Q4 our key releases are Midnight Club Los Angeles, BioShock for PlayStation 3, NBA 2K9, NHL 2K9 and Carnival Games Mini-Golf for the Wii.

For Q4, we expect non-GAAP net income per share in the range of $0.10 to $0.20 on $300 million to $350 million in revenue.

This excludes stock-based compensation expense of $0.18 per share and expenses related to unusual matters and reorganization costs of $0.01 per share.

Our Q4 releases are more broadly distributed among the labels and include our NBA and NHL titles, so we expect gross profit margins to decrease into the low 30s in that quarter.

On a non-GAAP basis we expect overall operating expenses relatively flat in Q4 as compared to Q3.

Selling and marketing expenses are increasing slightly primarily driven by higher marketing expense for the continued support of Grand Theft Auto IV, the launch of Midnight Club Los Angeles as well as the launch of our key Sports and other 2K titles.

This increase should be offset by several factors.

G&A expense will decrease slightly from Q3 due to our continued cost savings initiatives and we also expect R&D expense to trend down slightly from Q3 as we see our capitalization rates increase in Q4.

Looking ahead, we're building a strong lineup for fiscal 2009 that will include sequels to some of Rockstar's AAA brands and episodic content for Grand Theft Auto IV and Xbox 360.

2K Games' key AAA titles will include Borderlands, Mafia 2, BioShock 2, and 2K Sports will deliver their recurring sports titles.

2K Play will publish additional Nick Jr.

products under their agreement with Nickelodeon.

We'll be expanding our downloadable content as well as other ancillary revenue streams.

We also expect to see growth in the Asia-Pacific market as a result of our new initiatives in that region.

Fiscal 2009 will also reflect a first full year of our cost savings initiatives and we're very optimistic about our future and the opportunities to further build shareholder value.

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

Thanks, Lainie.

To summarize Take-Two's performance for the first half of fiscal 2008 clearly shows the strong results this Company is capable of producing and demonstrates our potential for continued value creation.

With our diverse portfolio of popular franchises, unparalleled creative talent, and a vastly improved operational and financial picture, Take-Two's in a unique position to capitalize on the opportunities presented by the current industry cycle.

We look forward to translating those strengths into increasing value for our stockholders.

And we'll now be glad to take your questions.

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 Eric Handler with Lehman Brothers, Incorporated.

Please proceed with your question.

Yes.

Thank you very much.

Given your improved outlook for this year can you give us a sense of what free cash flow generation might look like?

And then, secondly, in terms of your Asian expansion, what titles do you expect are going to be the first that you might look to monetize online or lead the charge there?

Thanks, Eric.

It's Ben here.

So your first question with respect to cash flow, we don't actually provide it, as you know.

So I'm going to defer on that one.

And with respect to Asia we have a goal -- not a goal, but we have some very important and valuable brands that translate very well to Japan, to China, to Korea.

We're not in a position yet to describe or to articulate which brands we'll be leading with except to say that we think that there's a huge opportunity for multiple franchises of Take-Two in a bunch of different territories within Asia, and as you know, Asia's a fairly large place.

Yes, and just, Eric, on the cash flow point, obviously, we have disclosed our gross margins, a little better than expected and obviously you know that this business generates cash when it does well and we're certainly doing well.

And just as a follow-up with Asia, should we assume that you're not going to be getting the package because all of it's for the online initiatives?

We intend to follow the market and Japan is really the key market.

We tend to be console oriented, although we also launch on PC.

But the console market in Asia pretty much is in Japan and the rest of it online is on PC.

Okay.

Thank you.

Thank you.

Our next question comes from the line of Ben Schachter with UBS.

Please proceed with your question.

Hi, guys.

Congratulations on a nice quarter and a great launch of the game.

I'm not sure if you said this in the beginning of the call but did you give a percentage of revenues from GTA?

We didn't give that specific information, but can I tell you that GTA IV and our catalog for GTA in total is approximately 78% of our total publishing revenue.

In the quarter.

In the quarter.

Okay.

Just back of the envelope math, that implies an internal royalty rate what, of about 15% or so, 14%, 15%?

We don't provide that information, Ben, but in our press release today as well as in our 10-Q we do break out internal royalties and it's not all for GTA IV or for the Rockstar label, but it's primarily would be for this quarter based on the revenue.

Okay.

Strauss, could you remind us in terms of the comment you said before about formal talks, just remind us the process through which you have to let the SEC know when you're in talks or we have to file something about when you're in talks?

We have to file it if and when we're in negotiations to be specific.

Discussions and negotiations are -- there are terms of art around those and we are in formal discussions right now, not in negotiations.

Okay.

Any comments on the SEC, what are the key issues there?

No.

I think we've been -- as we've said, we've endeavored to cooperate as much as possible.

We put out some information on that today.

Okay.

And then the last question, the music genre given the Rockstar's heritage, is that an area you guys might be interested in?

Possibly.

You know, there's nothing we've disclosed on the release schedule right now.

I think that's a long conversation and not a short one in terms of where the business is going.

Is it a music genre, is it a rhythm genre?

It also remains to be seen how that genre holds up over time and that's terribly important when you invest in AAA properties that you expect people to play for upwards of 20 hours.

So probably better conversation to have over a cup of coffee, but the answer is the release schedule doesn't include any rhythm titles right now.

All right.

I'll take you up on that and thank you.

Thank you.

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

Please proceed with your question.

Hi, everyone.

My congratulations, too, on the outstanding launch of GTA IV.

Thanks.

I was wondering if you could tell us what the current level of cash is following collection of some of the receivables on GTA IV?

And also on the 33 titles that you have in development, could we get a platform breakdown and also the level of R&D staff at the end of the quarter and where you expect that to be at the end of the year, at the end of the fiscal year?

I'll take the first question first on the current level of our cash.

We provided our balance sheet information as of Q2 today and we do provide our cash on a quarterly basis, but we don't provide midquarter updates.

But our cash will be significantly higher by the end of Q3 as our orders that we receive for GTA IV convert into cash, which we mentioned earlier.

Okay.

And platform breakdown on the number of titles?

I'll have to get back to you on, that Ed.

I don't have that in front of me.

Okay.

And then lastly, just the R&D staff at the end of the quarter and where you expect that to be at year-end?

At the end of the quarter, we're at about 1,350 employees and I don't have the exact forecast for year-end, but it would probably be about that number or growing slightly based on our development schedules.

Great.

Thank you.

Thank you.

Our next question comes from the line of Tony Gikas with Piper Jaffray & Co.

Please proceed with your question.

Hey, good afternoon, guys.

Good job during the quarter.

Few questions, I'll start out with some GTA-type questions.

Could you share with us what GTA IV was shipped or sold on an international basis?

Number 2, can you talk a little bit about where the development of the downloadable or episodic content for GTA IV is?

Is that well along in terms of completion there?

And then perhaps anything that you could share with us in terms of pricing of that episodic content as that starts to roll out in the new fiscal year, and then I have a follow-up.

Sure.

This is Ben.

In terms of GTA, pretty much followed kind of the typical, in terms of international versus domestic breakdown, pretty much followed a typical pattern for our games and that means slightly over 50% for the U.S., just over 50%, so roughly about half and half and that's rough.

On the episodic content, I think the question you're asking is there an issue in the game.

The reason we moved the episodic content into FY '09 is really for portfolio balancing more than anything else, and we don't anticipate any issues with release of that other than delaying it for portfolio balancing reasons.

And your price -- and the question on pricing for the title, we haven't disclosed that yet and aren't prepared to do so today.

Was the episodic content developed alongside the game so there really isn't a lot to kind of finishing it or is that sort of a separate project?

You know, it's the same team developing it and the same studio that's developing it.

But again, the delay is not about kind of development issues.

The delay is about portfolio balancing issues.

Okay.

And then last question on GTA, any update for us or announcement on a potential hand-held version of Grand Theft Auto IV?

Nothing to announce today, sorry.

Okay.

And then how did Jack of All Games perform in the quarter?

Is there anything you can share there in terms of the profitability of that business?

Are you still seeking any alternatives for that division?

Tony, it's Lainie.

Jack of All Games did very well this quarter.

Their margins are running from the mid- to high -- I'm sorry, mid- to high single-digits and we are still working on getting some gaming efficiencies in the business and we don't have any current plans to sell the business.

We're really working on running the business as efficiently as possible.

And things are going well.

So that's a 5% to 10% gross margin?

Is that what you're talking about?

Yes, gross margin.

Okay.

And then last question, could you just talk a little bit about what types of partnerships that the Company is considering at this point?

Is this intellectual properties, or development partnerships, distribution?

I'm not sure.

In what context are you asking about partnerships?

In the context, earlier in the call you said that you were, the Company was seeking strategic alternatives, I guess in that context.

Well, basically what we've said is we have our eyes open to anything that maximizes stockholder value including remaining independent or possibly business combinations or anything else that might come up as we examine those alternatives.

We really can't be any more specific than that right now.

Okay.

Thanks, guys.

Thank you.

Thank you.

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

Please proceed with your question.

Hey, guys, congratulations on a wonderful quarter and certainly congratulations to the Rockstar team for putting a tremendous title into the market, absolutely awesome.

Just curious on your guidance for Q3.

If I understand it right, 78% of your publishing sales for the quarter were from Grand Theft Auto IV and catalog, it's about $380 million or so I think.

I'm thinking about average total sale prices of $56.

Be about 5.7 million units shipped in Q2.

Does that sound about right?

No.

It's a little on the high side there.

Okay.

Because you've already shipped 11 million units from May 31, right?

Yes.

Okay.

So even if I'm high, if I assume that you have about five million units going into this quarter, average wholesale price of $66, that's getting into about $330 million in sales and that's within your guidance range already?

Can you repeat the question, Mike?

I'm not sure I'm following you.

If you've shipped six million units roughly and that's high for Q2 and Q3 you said through May 31, you've shipped 11.

So if I net out five and assume an average wholesale price of $66, wouldn't that be about $330 million in sales?

Mike, I'm sorry, I didn't hear you the first time, the number you gave me for the units I thought you said was a different number, so you're actually a little bit low there for Q2.

I'm a little low for Q2.

Yes, you're pretty low.

Mike, you don't have to build your model on the call here, but --

(laughter) All right.

Just looks like it's a little conservative.

The six million we announced for first week sales would sell through to consumers.

Right.

Let's not build your model on the call.

Okay.

And then if you could just give us a little bit of color how your development teams are working through EA's wholesale bid?

I think we've demonstrated that despite distractions everyone has their head down and a smile on their face and is getting the job done and we're very immensely grateful to the team, to the Rockstar label, to the 2K label, to all of our management, our sales management, distribution management, corporate management worldwide for staying focused on the job at hand and staying focused on building this Company and building shareholder value.

And that's our job and I think everyone's done a remarkable job staying focused and we're, as I said, we're immensely grateful for the team's terrific work under not insignificant pressure.

Great.

Thanks, guys.

Thank you.

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

Please proceed with your question.

Yes.

Thanks for taking the call.

Two, if I might.

First, can you talk about what's changed in the Sports business since we last talked that's now it's not going to make break even?

And then can you give us a sense of the scale of the expected loss for the fiscal year?

And then, secondly, if I look at everything you've done on the revitalization plan that you set out in kind of the first 100 day call, it sounds like you've made all of it except for the Sports element.

Can you talk about what else you might go attack next in the business, either over the next year or if you have the opportunity to do this in the next three years, what else that you've seen in the year you've been there where you can take the business?

Thanks.

I appreciate it.

On the Sports side the primary reasons for our lack of profitability were lower tax rates than we expected on the increased installed base of Xbox 360 and PS3 hardware, and we made some changes in the release schedule that obviously reduced the revenue a bit.

I mean, I think you asked how serious is it and the answer is, we take our job seriously across the board.

As I said earlier, this is a work in progress.

We're committed to the Sports business and we feel like we're going to get there and we're disappointed that we haven't gotten across the finish line this year.

We are keeping focused on doing just that.

How are we going to do it?

Continuing to make the best titles in the business that rate better than the competition head-to-head.

I think we have the best developers in the business and I believe we can continue to do that.

In terms of your comments about the 100-day plan, I guess we're -- maybe we're a little more self-critical than you were.

This is a wonderful organization and everyone here also agrees we can do better and some of the opportunities that we've outlined previously are really going to be market driven.

They're going to benefit everyone in the market as this business becomes more of a multiplayer business.

There's an opportunity for micro payments and subscription businesses.

There's really terrific economic opportunities out there.

Our focus is on delighting our consumers.

Our focus is on bringing consumers what they want and our experience is if you give consumers what they want and you delight them, then you tend to do well economically, also.

So there are any now number of areas that we're pursuing.

I think we've talked today about the ones about which we're most excited.

Ben talked about our initiatives in Asia.

That is, after all, the second largest market on earth for interactive entertainment and we need to participate in that market.

In general we think international is a big growth area.

When we talk about being the most creative, the most efficient and the most innovative, I think we do have the most creative Company here.

Our vast collection of owned intellectual property and our unparalleled development teams speak for themselves.

I do think we have the most efficient organization pound for pound in this business.

I'm really proud of the steps this team has taken to do so and to do that for our business.

I think we still have a long way to go in innovation.

I think we all feel that we do, and frankly, we want to turn our attention to that and are turning our attention to that and that's not something that delivers results overnight.

It is something that delivers results over time.

One of the most wonderful things about interactive entertainment is, as exciting a time as this is for the Take-Two organization at large, the wind's at our back and there's a lot of interesting stuff that's going to happen in the next few years in this business.

Great.

Thanks.

Just to clarify the Sports question the second part of my commentary or question there was can you give us a sense of the scale of what that loss will be this year?

You know, we don't break it out, but obviously we're having a terrifically sound year and our guidance today reflects that.

So I think you can arrive at your own conclusions.

In the context of everything else that's going on with the Company it's certainly something we can manage.

As Strauss said, the guidance kind of speaks for itself.

Got it.

Thanks.

Thank you.

Our next question comes from the line of Jeetil Patel with Deutsche Bank Securities.

Please proceed with your question.

Great.

Thank you.

Two questions.

I'm not sure how simple this would be to do, but would you ever look at divesting different labels or brands, just 2K Sports or the Games division just to maximize shareholder value as you go through this process, and second can you just remind us what your NOLs look like for U.S.

and international?

Thank you.

You know, I don't think it would maximize shareholder value to piece apart the Company, and we really would be -- we'd be loathe to do that because we don't think it's how you create value in this business.

On the NOLs, Lainie?

We don't share our NOL balance on a quarterly basis, but it is in our 10-K at the end of the year.

But I can tell you that we did use some of our NOLs this quarter with our income and we do disclose in our 10-Q that we've reduced our valuation allowance against our deferred tax assets by approximately $24.5 million which you can assume is primarily a reduction for the NOL.

Does that answer your question?

That helps, thanks.

Okay.

Thank you.

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

Please proceed with your question.

Hi, thanks.

Could you talk a little bit about the BioShock movie deal in terms of what kind of financial impact it might have, how much creative control do you and 2K Games have over the movie, and is it fair to presume that the movie won't be released in time to coincide with the launch of BioShock 2?

Thanks.

You know, we're really excited about it, but we definitely did structure this deal so that we have no economic exposure or risk.

The economic exposure of risk is being borne by our production partner, Universal Pictures.

We're very pleased with the upside, the economic upside that we have, but we really haven't -- we obviously have a sense of what it is.

It is not something that we normally disclose.

We do feel it's something that could be very beneficial, but it is at this point pretty speculative.

I think you're right.

It's unlikely that the picture would be released coincident with BioShock 2.

It would be more likely that it would be released coincident with Bioshock 3.

That also remains to be seen.

That said, we took enormous pains to do a couple things that haven't been done before in the business.

One is that we went directly to the studio partner.

We didn't go through a production intermediary.

A number of us around the table have a little bit of motion picture experience, so we felt that was the best way to handle it.

And we also attached to the picture up front an A plus producing and directing talent in Gore Verbinski who is highly committed to getting this picture made and we also set the picture up at Universal because they're highly committed to getting the picture made.

So to the extent that the picture does well we're all going to be very happy with the results and we tried very hard to put together a package that ensures that our millions of fans are going to be able to see a BioShock movie on the big screen.

That's pretty exciting.

Great.

Thanks.

Thank you.

At this time there are no further questions.

I'd like to turn the conference over to Mr.

Strauss Zelnick for closing comments.

Well, listen, obviously, we all feel terrifically gratified by the results.

At the risk of being repetitive, what we do around here at Take-Two is a team sport and everyone on this call today, Ben, myself, Lainie, Cindi want to thank all of our colleagues all around the world for their incredible performance.

I want to emphasize the contribution of Rockstar Games and all the terrific people there who just sweated blood to make this happen.

Frankly, as well as the entire Take-Two staff around the world that made sure we got this game into the hands of the millions of consumers so far.

This is the new Take-Two and we're awfully proud to be sitting at the table together.

So thank you very much.

Thank you.

Ladies and gentlemen, this concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.