Take-Two Interactive Software Inc (TTWO) 2008 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome the Take-Two Interactive fourth quarter and fiscal year 2008 results.

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

A 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.

Cindy 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 today for our fourth quarter conference call.

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

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.

A operating results may vary significantly from these forward-looking statements based on a variety of factors.

These important factors are described in our press release today and our filings with the SEC including our 10-k for the fiscal year ended October 31st, 2007, and our 10-Qs for the interim quarters of fiscal 2008.

These documents may be obtained from our website at www.take2games.com.

Now I'll turn the call over to Strauss.

Thanks, Cindy.

Good afternoon, everyone.

Today we'll review our financial results for the fourth quarter and we'll discuss our strategic road map or product line-up and initial guidance for the coming year.

We'll provide our insights on the economic environment and explain our belief that we're well positioned in these clearly uncertain and challenging times.

I'm pleased to announce that Take-Two once again achieved its guidance for the fourth quarter.

For the full year we delivered the strongest revenue and earnings in the Company's history.

Our record fiscal 2008 results were driven by the phenomenal success of Grand Theft Auto IV from Rockstar Games.

Other top titles for us this year were Midnight Club: Los Angeles, NBA 2K9, Carnival Games, Grand Theft Auto catalog titles and Sid Meiers Civilization Revolution.

These strong results reflected the actions we began taking in early 2007 to transform our business.

Our initiatives included a sharper and more disciplined focus on building our portfolio of world class titles, the divestiture or revitalization of non-core businesses and continued emphasis on becoming more efficient and more cost effective.

I would really like to highlight today's announcement that we've entered into new long-term agreements with Rockstar Games' Sam Houser, Dan Houser and Leslie Benzies, as well as several key additional members of the creative team behind our largest selling franchise, Grand Theft Auto.

We're thrilled to begin this new chapter in our successful relationship with Rockstar.

This team has been instrumental in the development and success of many of our multi-million unit internally owned franchises.

In addition to Grand Theft Auto, they include Midnight Club, Bully, Max Payne, Red Dead Revolver, and Manhunt.

Rockstar's talent and creativity are unparalleled in our industry.

We have established a new incentive compensation program for the Rockstar games label that's primarily based on a profit sharing structure across the entire organization and we've instituted a broad based long-term equity compensation program as well, including a restricted stock grant that vests over the term of the agreement.

We believe this new partnership meaningfully aligns the interests of our creative teams with those of our stockholders.

Now I'd like to offer our perspective on the holiday season and beyond.

We've always said that entertainment isn't immune to economic downturns and these times are certainly both volatile and challenging.

I'd described the prevailing trends for our industry as mixed.

Now the good news is that video games continue to be highly sought after gifts this season.

AAA products remain high on consumer's wish lists and many people believe that these games provide greater entertainment value than other forms of entertainment.

While we've seen some holiday promotional pricing, our belief is that AAA product pricing will largely continue to hold through the holidays and beyond and many retailers have reported stronger sales for interactive entertainment products in contrast to other categories.

That said, it's important to remember that consumers of interactive entertainment are as much affected by the economy as are other shoppers and, while Wal-Mart and other discounters have remained relatively strong, the bankruptcy filings of Circuit City in the U.S.

and Woolworth in the U.K.

have contributed to an uncertain atmosphere.

In short, broad softness at retail has and probably will continue to have an impact on our industry.

This softness has affected many of our peers and we too are experiencing lower than expected overall holiday sales.

The outlook for the economy is vastly different today than anyone might have expected this past summer or even as recently as 45 days ago.

So we've taken a harder look at our forecasts for the next 12 months and we've significantly reduced our expectations.

As I've said before, we see it as our obligation to operate the Company profitably on a non-GAAP basis even in a year without a major new GTA release.

The initial guidance we're providing today reflects that.

Lainie will provide further details on the first quarter and discuss our guidance for fiscal 2009.

Taking all these factors into account, we've adopted what we believe is a prudent outlook for this fiscal year.

It's important to be clear that we believe we're extremely well positioned in all facets of our business to navigate these challenging times and will continue to aspire to be at the forefront of our industry.

Now I'll turn the call over to Ben who will provide more detail about our fourth quarter results, our operations, products and our strategic road map for the coming year.

Thanks, Strauss.

I'm pleased to announce that we had an extraordinary performance in fiscal 2008.

For the year we recorded record results, $1.5 billion in revenue with non-GAAP earnings per share of $2.08.

We ended the year with $280 million in cash.

Our cash net of debt was $210 million.

Our fourth quarter results were in line with our guidance.

Sales were led by Midnight Club: Los Angeles, NBA 2K9, Grand Theft Auto IV and Carnival Games.

Net revenue for the quarter was $323.4 million compared with $292.6 million for Q4 last year.

Earnings on a non-GAAP basis were $0.02 per share compared with $0.05 per share for the same quarter a year ago.

Our Q4 results were negatively impacted by foreign exchange rates, which Lainie will discuss later in the call.

Looking to Q1, we're only about halfway through the quarter, but our results will be affected by the challenging retail environment and a slower than expected start for Midnight Club: Los Angeles.

We still believe that Midnight Club: Los Angeles will perform well over time as the prior Midnight Club titles have historically enjoyed a long tail in the market.

While Grand Theft Auto IV has done phenomenally well and exceeded our expectations this year, its strongest sales came earlier in the year than we had expected.

Additionally, the first downloadable episode for GTA IV and Grand Theft Auto Chinatown Wars are now scheduled for release in Q2.

Lainie will provide further details about the quarter.

We're operating today in an environment of great uncertainty.

We are keenly focused on a number of actions that will position the Company to deliver the strongest possible performance in these challenging times while continuing to scale our business for profitable growth in the future.

Beyond purely economic factors, success in our industry is driven by hip products and our creativity and owned IP drives Take-Two.

We are maintaining our focus on creating the most innovative AAA games in the industry today and are committed to nurturing the talent of our 1,500 developers across 15 studios who continue to set new benchmarks in video games.

You can see our commitment to excellence in the ratings.

For the calendar year through November 2008 the average Metacritic rating for our products was 80%.

That's higher than any other third-party publisher.

In keeping with our strategy of releasing a select number of top tier games, many of which are internally owned and developed we are very pleased with our solid roster of high quality titles in the pipeline for 2009.

The first downloadable episode for GTA IV for Xbox Live, Grand Theft Auto IV: The Lost and the Damned will be available on February 17th.

The trailer had its debut at the Spike TV video game awards last Sunday.

It looks fantastic and delivers an incredible and entirely new experience in Liberty City.

I'd like to take a moment to pause and congratulate the entire Grand Theft Auto IV team for winning Spike TV's 2008 video game of the year award this last Sunday.

Grand Theft Auto Chinatown Wars will be coming to Nintendo DS on March 17th, marking the first time that the world's largest video game franchise will meet the current gen's largest installed base.

Rockstar will offer a south central upgrade map and content pack, its first downloadable content for Midnight Club: Los Angeles in early 2009 for both Xbox 360 and PS3.

Rockstar is scheduled to release (inaudible) Raider in mid 2009 and Rockstar has one AAA title currently under development planned for the release in fiscal 2009.

2K will release Borderlands, an exciting new sci-fi franchise from acclaimed developer Gear Box.

Combining first person shooter game play, RPG character progression, and an array of weaponry, Borderlands is poised to deliver an incredible video game experience.

2K Games will release BioShock 2.

The original BioShock won last year's Spike TV game of the year award and is the second highest rated title on Xbox 360 and the second highest rated third-party title on the PS3 according to Metacritic.

Mafia II, the sequel to our 2 million unit selling hit is due out from 2K next year.

The new Mafia II trailer had its worldwide premier during last Sunday's Spike TV video game awards.

Once again, the team has done an exceptional job in capturing all the nuances of the genre.

Our 2K sports franchises are the quality leaders.

NBA 2K9 is the top rated and top selling basketball game in this console cycle, continuing a track record that has made the NBA 2K franchise the top ranked NBA title for the past 18 years.

We remain confident that we can build on this solid platform of quality titles to achieve scale in our sports business.

This year from 2K sports, we'll release MLB Front Office Manager, Major League Baseball 2K9, NHL 2K10 and NBA 2K10.

And this year's lineup will include additional titles for Major League Baseball.

We'll grow our family entertainment portfolio with the launch of seven new titles from 2K Play.

We're excited to be expanding on our successful relationship with Nickelodeon by releasing a new slate of products, including the new Dora the Explorer titles and two soon to be announced properties.

And our internal Cat Daddy Studios, the talent behind our Carnival Games franchise, will deliver two exciting new properties that are poised to strengthen our position in the family entertainment category.

Carnival Games has been a tremendous success, having sold over 3 million units, and the brand continues to experience strong sales.

One change to note in our 2009 pipeline, as a result of Atari's recent acquisition of Cryptic Studios, we no longer plan to publish the MMO Game Champions on-line.

I'd like now to discuss several measures we're taking in response to the present economic challenges.

While we benefited from the significant cost savings initiatives that we began to implement in 2007, we're continuing to look at the Company's expense structure.

Although we don't anticipate the need for any additional dramatic cost initiatives, given that we've already taken substantial costs out of the business, we continue to explore areas where we could derive additional benefits.

That said, we're continuing to invest in the growth of our creative resources.

While other publishers are closing studios, we view this as an opportunity to acquire strong talent and are selectively hiring additionally highly talented developers.

We've taken steps to maintain our access to the credit market given the current constraints on credit worldwide.

Shortly after our management team joined Take-Two last year, we obtained a credit facility that would provide us with additional flexibility in running our business as needed.

Given the current market conditions, we were fortunate to have our facility already in place and available to us.

As a matter of prudence, as of October 31st, we drew down $70 million on this facility to fund our working capital needs for this holiday season and beyond.

Our lending group has been incredibly supportive.

We very much appreciate their confidence in our team and our business.

We're continuing to focus on many opportunities on the horizon on which we can capitalize to broaden our offering and diversify our revenues.

We believe that downloadable content is a significant opportunity in the near term.

We're excited about the creative opportunity and profit potential of this new distribution channel.

We're innovating with episodes for Grand Theft Auto IV and we're looking across our entire portfolio to see where else this makes sense for our brands.

Network game play is another important means of maximizing the value of our strong intellectual property.

It also helps address some of the concerns that we have with respect to sales of used products.

There is the potential for microtransactions and subscriptions to enhance the packaged goods business by offering multiple revenue channels as other media companies have successfully done.

And we're seeing emerging opportunities with the iPhone.

We believe we'll continue to benefit from the growing install base of the Nintendo Wii.

Our relationship with Nintendo has never been stronger and the success of Carnival Games franchise gives us a great foundation upon which to build.

Our strategy of selectively developing AAA titles extends to our approach to our family entertainment portfolio.

We will continue to focus on developing a limited number of titles that have high potential for success.

Carnival Games is a perfect example of that strategy yielding incredible results.

We're expanding our presence in emerging markets.

These could well be the first economies to recover from a worldwide recession.

We opened an office in Asia earlier this year and believe that we are now in a much stronger position to capitalize on the opportunity.

Our world renowned content will help drive our expansion into that region.

Operating in Asia will be particularly important as we explore opportunities in microtransactions and subscriptions.

We'll further leverage our strong catalog business, which can generate up to 30% of our revenue.

One of the benefits of having AAA products is that over time they become valuable drivers of our catalog.

Some believe this current console cycle lasts longer than originally expected, our catalog could be much more valuable over time.

Lastly, there are opportunities to extend our franchises into traditional media including TV, film and music.

To summarize, while we recognize the potential economic challenges that our industry and Company face, we remain steadfast in our determination to deliver value by being the most innovative, most creative and the most efficient Company in the interactive entertainment industry.

We have a strategic road map that we believe will build upon our success.

We will continue to transform this Company and expand our global leadership, including creating original IT and AAA games, offering the best home for and partner to the top creative talent and setting new benchmarks for quality and innovation, Deriving ongoing benefits from completed revitalization plan, and maximizing our cost savings and efficiencies going forward, prudently expanding our international presence in emerging markets especially Asia, increasing the scale of our business through opportunistic but selective M&A, and exploiting new revenue and growth opportunities including leveraging our catalog.

With that, I thank you and I'd like to turn the call over the Lainie.

Thanks, Ben and good afternoon, everyone.

Today I'll review our fourth quarter results and then discuss our outlook for Q1 and fiscal 2009.

Net revenue was $323 million in the fourth quarter, compared with $293 million a year ago.

Non-GAAP net income was $1.6 million compared to non-GAAP net income of $3.4 million last year, with a non-GAAP earnings per share of $0.02 compared to non-GAAP earnings per share of $0.05 last year.

Our press release provides a complete reconciliation of our non-GAAP to GAAP numbers.

Affecting our Q4 results was approximately a $7.7 million negative impact to net income or $0.10 per share from foreign exchange rates as compared to our guidance.

We are pleased to report that this is the sixth quarter in a row that we have met or exceeded our guidance.

This quarter's results were led by Midnight: Club Los Angeles, NBA 2K9, Grand Theft Auto IV, and Carnival Games.

Jack of All Games business also grew year-over-year, primarily driven by strong current generation hardware sales and demand for Wii products.

Our GAAP results for the fourth quarter were a net loss of approximately $15 million or $0.20 per share, compared with a net loss of $7 million or $0.10 per share in the fourth quarter of 2007.

Our GAAP results included $9.3 million in stock-based compensation expense and a total of $7.2 million of professional fees and expenses related to unusual legal matters, as well as business reorganization costs.

Looking at our consolidated results, our non-GAAP gross margin for the quarter was 31%, flat with last year.

Our Q4 revenue mix was also comparable to last year with publishing at 75% of total revenue.

Our split between North America and international revenue was 65% to 35% in Q4, compared to 74% to 26% in Q4 of last year.

Excluding our sports and distribution businesses, our North America/international revenue split for the quarter was about 45% to 55% compared to 60% to 40% last year.

This is consistent with our strategy to grow our international business.

Non-GAAP operating expenses in the fourth quarter were approximately $99 million, up from last year's fourth quarter for the following reasons.

Sales and marketing expenses accounted for the largest increase, primarily due to advertising for Midnight Club: Los Angeles and Grand Theft Auto IV.

R&D expenses increased with a continued investment in our development studios, including the three additional studios we've opened or acquired this year, 2K Tech, 2K Marin and Rockstar New England.

Also, G&A expenses increased slightly compared to last year, due primarily to increased professional fees and the G&A costs related to our three new development studios and our newly established Asian operations.

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

Please note that we are now including our foreign exchange gains and losses and our interest in other income expense lines.

We've previously included this in our G&A expenses.

We had $4.3 million in foreign exchange loss in Q4 which is included in that line item.

We incurred a taxable loss during the fourth quarter which partially offset the prior quarter's profits, resulting in a fourth quarter tax benefit.

Moving on to our balance sheet, at the end Q4, we had $280 million in cash including $70 million from borrowings on our credit line.

Cash was used in the quarter for inventory purchases, product manufacturing costs, and advertising in advance of the holiday season as well as internal royalties for titles that had shipped earlier in the year.

Our accounts receivable reserve was about $68 million at the end of the quarter, which represented approximately 30% of gross receivables.

Inventories at the end of the quarter were approximately $104 million, up slightly from this time last year, primarily due to many of our new releases shipping late in the quarter this year and also Jack's increased level of hardware business compared to last year.

While software development costs and licenses were flat year-over-year, we amortized a significant amount of software development costs during the year as a result of our key releases in 2008.

At the same time, we continue to invest in future products.

We currently have 36 titles in various stages of development.

Now to our outlook.

We are issuing initial guidance today for fiscal 2009.

For the full year, we expect non-GAAP earnings per share in the range of break-even to $0.20, from $1.1 billion to $1.25 billion in revenue.

This excludes stock-based compensation expense of $0.52 per share and expenses related to unusual legal matters of $0.05 per share.

I'd like to offer some important comments around the initial guidance we're providing today.

Given the challenging economic environment that we expect to continue well into 2009, we took a very hard look at our unit assumptions across all titles and adjusted them accordingly.

We cannot predict how long the current economic conditions will last or how significantly they will impact our business over the next 12 months.

And while we continue to be diligent in working to protect our business in advance with regard to potential bad debt exposure and have had no material impact from any of the retail bankruptcies to date, it may be difficult to completely eliminate that exposure.

I'll provide more detail later in the call on the timing of our key products in 2009.

It's important to note that our release schedule is very heavily back end loaded, with many of our key AAA titles planned for release in Q4.

Maintaining our release schedule is very critical to our fiscal year results.

Another area of variability in our results comes from foreign exchange rates, which have been very volatile in the past couple of months.

For the purposes of guidance we assumed spot rates as of the time we finalized our forecasts.

If the U.S.

dollar strengthens against the euro and pound, we may have down side EPS exposure.

Let me provide some more specific data points on our 2009 outlook.

We expect our total revenue mix to be 80% from publishing and 20% from distribution.

On a blended basis for publishing and distribution, we expect gross margins for fiscal 2009 to be in the low 30s.

This is down from fiscal 2008, primarily due to the strong contribution of Grand Theft Auto IV in 2008.

We expect our split between North America and international revenue to be about 75% to 25%.

Excluding our sports and distribution business, our North American international split is expected to be approximately 55% to 45%.

Within publishing, we expect the relative revenue breakdown from our labels to be roughly 45% from Rockstar and 55% from 2K.

The 55% from 2K breaks down as follows: 25% from 2K Sports, 20% from 2K Games and 10% from 2K Play.

Now let me give you an idea of where we see our operating expenses trending.

Note that our operating expense and tax guided is provided on a non-GAAP basis.

We see 2009 G&A levels improving by approximately 10% in absolute dollars compared to 2008, based on our cost cutting initiatives and reduced personnel expenses following our restructuring.

The change in foreign exchange rates is also expected to have a positive impact on G&A expenses of approximately $6 million compared to 2008.

Additionally we are forecasting a decrease in professional fees, as we expect to resolve some of our outstanding regulatory issues.

Lastly our bonus accruals for 2009 are lower than for 2008 based on our record performance for 2008.

These expense reductions are being partially offset by expenses related to the new office we opened in Asia this year and the three new development studios we added in 2008.

Sales and marketing expense should remain relatively flat in absolute dollars next year as our spending is closely tied to our product releases.

We have several key titles planned for 2009.

The change in foreign exchange rates is expected to have a positive impact on sales and marketing expenses of approximately $3 million although this would be offset by costs related to our expansion efforts in Asia.

R&D will grow slightly due to the continued investment in our development studios and the full year cost of our new studios.

Depreciation and amortization should decrease due to the sale of our Ohio warehouse operations to Titan this past year.

Based on our current forecast we expect our tax expense to be approximately $7 million in 2009.

Fiscal 2009 estimates reflect tax expense primarily attributable to the Company's international operations.

We're also issuing guidance today for the first quarter.

We expect non-GAAP loss per share in the range of $0.70 to $0.85 on $175 million to $225 million in revenue.

This excludes stock-based compensation expense of $0.14 per share and expenses related to unusual legal matters of $0.01 per share.

Let me provide some additional data points on our Q1 outlook.

We expect our revenue mix to be about 55% from publishing and 45% from distribution, due to the seasonal ramp-up in Jack's business and the increased demand they're seeing for current gen hardware and software.

Our Q1 lineup of new releases is fairly light.

We have shipped Grand Theft Auto IV for the PC and later this quarter we have MLB Front Office Manager.

We expect continued sales of titles released in prior quarters including Midnight Club: Los Angeles, NBA 2K9, GTA IV and our Carnival Games titles.

We expect reduced gross profit margins in Q1 compared to last year.

They will likely be in the high teens.

This is primarily due to higher promotional and co-op spending this year.

Also, much of our Q1 publishing business last year was from older catalog titles where the cap software had already been fully amortized.

We expect gross margins to trend back up in Q2 with release of The Lost and Damned, the first episode of Grand Theft Auto IV, as well as Grand Theft Auto Chinatown Wars for the DS.

We expect overall operating expenses to trend down a bit in Q1 as compared to Q4, primarily driven by a reductions in G&A from our cost cutting initiatives and the positive impact from foreign exchange rates.

However, R&D expenses are expected to increase in Q1 as compared to Q4, due to lower software capitalization rates during the holiday season and some incremental IT spending.

G&A should trend down modestly from Q4 and depreciation and amortization should remain about flat.

We expect to show a provision for taxes in Q1 primarily related to our international business.

Lastly, I'll provide some more color on the timing of our key releases beyond Q1.

In Q2, we'll release The Lost and Damned, the first episode of Grand Theft Auto IV, on Xbox 360, Grand Theft Auto Chinatown Wars on the DS and Major League Baseball 2K9.

Our second half fiscal 2009 release schedule includes Borderlands, Bioshock 2, Mafia II, NBA 2K10, NHL 2K10 and the second episode of Grand Theft Auto IV for Xbox 360.

As I mentioned earlier, the majority of these titles are expected to ship in Q4.

Rockstar will release downloadable content for Midnight Club: Los Angeles on PlayStation 3 and Xbox 360 in early 2009.

They also have (inaudible) Raider planned for release in mid 2009 and one other AAA title planned for fiscal 2009.

Now I'll turn the call back to Strauss.

Thanks, Lainie.

I'd like to emphasize that we're very well positioned for these clearly challenging and uncertain times.

We'll continue to set new benchmarks with AAA products, make strategic investments for growth, manage our expenses to maximize our bottom line, and maintain our sound financial position.

We're driving toward continued success.

We believe in our strategy.

We believe in our team.

And therefore, we believe in our future.

We'll now take your questions.

Thank you.

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

(Operator Instructions).

Our first question comes from the line of Eric Handler with Barclays Capital.

Please proceed with your question.

Thank you very much for taking my question.

With regards to the Rockstar talent announcement, in the release you say they're going to be essentially carving out a separate studio which you'll release some of their titles.

What percentage of the new content from Rockstar going forward is going to be owned by the new studio versus what you own?

First of all I'd like to emphasize that the key elements here in this deal are our continued relationship with the top talent in the business.

The second point to emphasize is that we've announced that the economic incentives related to that extension are based on a profit sharing arrangement.

That's new.

That's changed and a reflection of a continued strategy and approach to make sure the interests of everyone who works at Take-Two are aligned with the interest of our shareholders and we're really pleased and proud that our entire team is up for that and excited about that.

It obviously will emphasize the focus on profitability around here and that's what we're aiming to do with our creative talent, with our executive talent, with everyone we're in business with.

On the specific question you posed, in addition to looking after existing properties and new properties that are wholly owned by our Company, there's an entrepreneurial opportunity for the key talent with whom we have a relationship at Rockstar to develop new incremental intellectual property that they own and that will be exclusively published by Take-Two.

In terms of the actual number of properties, it's not really possible to say at this point.

I think the key point is that more AAA products in which we have an interest that we exclusively publish, the better it is for our Company.

The more entrepreneurial and creative opportunity for our key talent and colleagues at Rockstar games, the better it is for the Company.

We think it's a win-win.

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

Please proceed with your question.

Hello.

Congrats on your year.

And then congrats on signing the Rockstar team.

We're curious what would happen to the contract if there was a change in control and then I have a follow-up.

Mike, thanks for your comments.

We don't ever give that kind of detail.

Apart from saying that we're very focused on managing the Company as responsibly as possible and frankly we're very proud of having done that in the past.

That's how we expect to operate going forward.

Okay.

And then obviously fiscal '09 is difficult, I'm guessing a lot of that's macro.

Can you talk at all about fiscal '10 and give us a reason to get excited here?

We're obviously not giving guidance for fiscal '10.

Moreover I think we're trying to emphasize that these times are indeed very uncertain.

Without trying to sugar coat the story, because it's not our nature, we feel really good about the position that we're in.

This new management team has been here for all of 18 months and one of the things we said is, in the release here in the release where we don't have an altogether new GTA title, we would like to deliver a Company that despite the volatility of the industry can be profitable and our guidance reflects an opportunity to be at least break-even, that's what we're saying.

And we're trying to do so prudently and responsibly.

But I defy anyone to call 2010 very focused.

In a very focused or very accurate way.

Right now we're focused on -- absolutely focused on the long-term strategy.

We've outlined it, but in terms of execution, 2009 is -- there's a lot going on and we're going to focus on executing against that and as I said, given the times, we feel pretty good about it.

Okay.

I wasn't actually asking for specific guidance for fiscal '10.

Just some titles from Rockstar that we heard about for a long time, Max Payne, Red Dead Revolver, the next Grand Theft Auto, can we expect that those games would be at fiscal '10?

We're not going to outline the release schedule.

I believe that we're continuing to build the business across all of our labels very, very effectively and I feel good about that sitting here today in 2008, heading into 2009.

Thanks, guys.

I think it's also, when it comes to GTA in 2010 it's really just way too early to talk about it.

We're still selling GTA IV at full price, at retail.

We've got downloadable episodes coming.

We've got Chinatown Wars coming.

It's simply just -- nobody's saying no, but it's just way too early to talk about 2010 and specifically GTA in 2010.

That's fair.

Thank you.

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

Please proceed with your question.

Rockstar deal and then one on cash.

On the Rockstar deal you mentioned it was profit share instead of the rev share.

Is that profit share on Take-Two or profit share on the Rockstar titles.

And then you also talked about equity.

The equity that they're getting, is that going to be -- the amount of equity, is that going to be based on performance or is there sort of a set number there.

And in terms of cash, any thoughts on cash burn in 2009 and what percentage of your cash is in the U.S.?

Thanks.

Well, in order, first of all, it's profit participation based on label results, obviously, because that's what's taking control.

On the equity side, let me just emphasize that the bulk of the economics are related to a profit participation and the equity is restricted stock grant that vests over the period of the new agreement.

Beyond that we're not prepared to comment.

In terms of international versus domestic, Lainie.

It's about 70% in the U.S.

and 30% in international.

In 2009.

In 2009.

And any estimate on the cash burn you expect in 2009?

We expect to burn cash but we haven't given guidance on our cash balances going forward.

I kind of prefer the word invest over burn.

All right.

Well, good luck on the year.

Thank you.

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

Please proceed with your question.

Hey, good afternoon, guys.

Couple questions.

So with the external studio now that some of the Rockstar guys are forming, is it safe to say that that involves Sam and Dan or Leslie, some of the key players?

And then on their employment contracts, are they now subcontractors of Take-Two working on one or two projects internally?

But they're now external employees I guess or subcontractors not actual employees of the Company.

How does that stand at this point?

Let's be clear.

These agreements are similar in character in terms of employment as before.

Nothing is changing in the way that you outlined.

They work for Rockstar Games.

Rockstar Games is a wholly owned subsidiary of Take-Two.

That's not changing.

So nothing like an independent contractor status or the like and the bulk of their activities is related to what they've done before.

There's an additional opportunity to create intellect property that will be owned by the key members of the team and published exclusively by Take-Two.

Let's not put the cart before the horse.

The key activity is the ongoing activity.

And these are immensely creative people and we've, I believe, successfully aligned interest and created an opportunity to create more hit titles and that will benefit Take-Two.

I also very much hope and expect it will benefit the creative people who are aligned to Take-Two.

That's a win-win and that's a business we try to be in at all times.

Is it the key players at Rockstar like Sam, Dan or Leslie that have formed this external studio.

We're talking about something to happen in the future.

It remains to be seen.

This is an opportunity that the key players with whom we're in business here, and that would indeed be Sam, Dan and Les, have an opportunity to develop some new intellectual property.

It's owned outside on an entrepreneurial basis and published exclusively by us.

But at the risk of begging your question, this is not a primary activity.

This is a secondary activity.

And there's no new -- there's no ribbon cutting going on for new offices.

Got it.

Okay.

Then just my last question, you did make some comments on current holiday sales.

But maybe you could characterize a little more specifically what you're seeing in retail right now.

Is it -- is the month of December progressing much more challenging than you expected or in line with kind of how you expected, which was mid single digit growth or what are you expecting for the month of December?

December is actually shaping up okay so far.

Bear in mind that we're running up to Christmas now and so it's day by day.

I think that some of our -- Midnight Club we think will have kind of a longer sales cycle than just Christmas.

And GTA I think is performing okay.

I think that will also have longer legs than just Christmas.

So I think December is kind of doing okay.

It's not knocking the cover off the ball but it's doing okay.

Okay.

Thanks, guys, good luck.

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

Please proceed with your question.

Hi, I've got a couple of questions, too.

I wonder if you could tell us what GTA IV contributed as a percent of Q4 and the fiscal year?

It's Lainie.

Hi.

For Q4, GTA IV plus the catalog for the entire franchise contributed approximately $40 million of net revenue which is about 17% of our publishing sales.

And for the full year it was $710 million in net revenue, which is about 60% of our publishing sales.

Okay, great.

And since you're on Lainie, let me try this one again.

I think I've asked this a couple of times.

So now we're looking at a launch date, a firm launch date for the first episode of GTA.

Could you give us a rough kind of margin picture on how that's going to come into the P&L?

I gather there's not going to be much of a cash impact but I'm wondering kind of what you're going to bring in and what the charges against the revenue are going to look like?

We still haven't shared the pricing information to date, so we really haven't -- can't give you the specific numbers.

As we recognize the revenue, we will have capitalized software amortization, internal royalties in the margin and then we'll have marketing expense and then the revenue will be recognized net of any royalties that are paid to Microsoft.

Okay.

So can you give us a range in terms of operating margin contribution, anything like that?

No we haven't shared that to date.

Not yet.

I'm going to keep trying in the future.

Okay.

Let's see.

I guess a lot of questions have been about the contracts.

So let me try it this way.

From the outside, how is the new contract likely to impact the contribution margin from Rockstar to -- as reported on an operating basis for Take-Two.

Can you give us a sense of how many basis points up or down, whatever?

We don't break out operating margin by label or by product.

As you know, we talk about our gross margin group wide.

I think the key point here is incentives are aligned and so everyone's in lock step to try and increase our revenue and do so at the most efficient cost base and we do expect good things to come out of that and by good things, do I think our margins could go up?

They absolutely could go up.

But we don't break it out by label.

Okay.

And then you specified that Take-Two is going to own the -- basically own the publishing rights.

What happens if this new studio does something that has a direct-to-consumer kind of model without a box on shelf?

What role does Take-Two play in that?

Again, I would rather not overstate the case.

The answer is we would still publish it.

It wouldn't change anything.

And the economics to us would be similar.

But again, I think it's sort of tail wagging dog time.

The key focus is -- on a going forward basis is just as it's been before.

Okay.

Last question.

I think in your remarks you mentioned kind of taking a haircut on unit assumptions across the board given economic outlook and so on.

Could you give us kind of a -- from 30,000 feet roughly how much you took off the average?

10%?

20%?

Whatever?

We took off about 20, 25%.

Off of units?

Yes.

Okay.

Thank you.

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

Please proceed with your question.

Sure.

Thanks.

Could you talk a little bit about what's happening with Midnight Club and why you think it may have sold a little softer?

Would you attribute it to the competitive release schedule?

Do you think it's the economy?

Do you think it's potentially something with the racing genre?

Thanks.

There are two ways of looking at it.

One is kind of how big is the pie and what is our share of the pie.

If you look at us versus our number one competitor, Need For Speed, we're actually doing pretty well I think.

Need For Speed certainly scored a lot less -- scored a lot lower as a game than Midnight Club did and Need For Speed is kind of -- look at week-to-week sales as it comes out, I think we've done very, very well.

You've got to bear in mind that Midnight Club is not an annual release like Need For Speed is.

It doesn't have the kind of brand recognition that Need For Speed has and so -- would I like it to be better?

Yes I would.

Do I think this title has a lot longer legs than any of our other titles?

Absolutely.

This title will sell for a long time to come, it's not only my hope, it's my belief.

And so I'm not -- I'm somewhat disappointed, but I'm not terribly disappointed.

I'm not terribly concerned.

All right, thanks.

I hope that answers your question.

If it doesn't, let me know.

No, that's good.

Our next question comes from the line of Heath Terry with FBR Capital Markets.

Please proceed with your question.

Thanks, really appreciate that.

Can you give us a sense -- you talked about the adjustment that you made to your forecast for next year because of the economy.

Could you give us a sense of what those forecasts would look like were we in a more normal operating environment?

Better.

They would look better.

(Laughter).

I mean, at the risk of -- I'm sorry, because it was just too tempting to resist.

Sure.

We pride ourselves on the fact that for six quarters since we've been here we've met or exceeded guidance.

We do that by taking the best look at our release schedule, our cost of doing business and our opportunities and assessing that in the contexts of the marketplace and that's what we've tried to do here.

In the last two months there's no question that as we've gone and looked at that, our view is less sanguine than it was before and that's reflected here.

But it's not -- we didn't just do an across-the-board change and we tried to be meticulous in a bottoms up basis and then we guided as well as we possibly could.

Our overall perspective is it's going to be more competition for fewer consumer dollars.

And as I tell people all the time, this Christmas doesn't terribly concern me.

Next Christmas is something we have our eye on and we just -- just can't call where the consumer is going to be.

But we are -- I think what we want to emphasize is, first of all, having only been at this table for still a relatively short period of time, we're very pleased with the way the Company has been transformed into a company that in a very difficult economic time, really entering a difficult economic time, we have a very sound financial condition.

We've got a terrific line-up.

We've got superb creative talent and they're with us for the future.

We have the highest rated games in the business.

Can't say much more than that.

And we believe that to the extent there's a storm there, we will weather it well.

I think to be more optimistic than that at a time like this, given the news even just in the past couple days, wouldn't be very prudent and we're aiming to be prudent as we look at both our Company and the world in which we operate.

Thanks, Strauss.

We've got the right strategy for this environment.

A limited number of releases, focusing on high quality, focus on the products with the most potential, rather than kind of flooding the marketplace with all sorts of product I think is the right strategy generally but specifically in this economy.

And then separately, having the resources to pounce on opportunities when they emerge because we believe they will emerge, having imagined what the landscape will look like when we come out of this and making sure that we have competitive advantage and the right assets to take advantage and be a leader when the economy comes out of this is really important to us.

So we'll be focused on husbanding our resources, we'll be focused on conserving cash and we'll be focused on a limited number of releases with the highest potential.

Just to encapsulate our typical way of looking at the world, our typical way of looking at the world is prepare for the worst, hope for the best.

Ant this is not a moment for heroics.

This is a moment for judicious behavior.

Yes.

No, understandable.

On the deal, to what extent do you guys see this being the model for your -- or a model that would you like to move to with your other tier one studios or is this something that you want to try and silo within the Rockstar team?

I think the -- what I would like to emphasize is when we came to the Company, we talked about aligning interests and in fact we spent a good deal of time and effort making sure that executive compensation, that is, for executives who aren't on the creative side of the business to make sure their incentives were aligned and formulaically so.

So as the Company performs better, our colleagues and we perform better and enjoy better results and it was important to extend that to the creative side of the house as well and what's great is that people's economic incentives do translate into behavior.

It's my view of the world.

And when people are on simple level playing field, where everything that one does that achieves a result is either good or bad for everyone and more or less in the same way, that's a really great benefit.

Among other things, you don't find yourself talking at cross purposes.

You find yourself agreeing on strategy and approach and we're big believers in that.

That said, no, I don't want to overstate the case because the people who are the top undoubtedly, unequivocally the top talent in the industry obviously are entitled to top situations economically and you don't seek to replicate those across the board any more than you compress the salary structure across the board for corporate executives.

So it's also terribly important that the groups that perform best, do best, the individuals who perform best do best and that overall, the Company's incentives, the human incentives and the stockholders' goals are all aligned.

That's what we're trying to do here and I can't tell you how pleased we are that we've been able to did that while retaining, encouraging, I hope, leading the top talent in the industry to do that all at the same time makes us feel really great and very well positioned.

Right.

Great.

Thank you.

Our next question comes from the line of [Leo Choi] with Pacific Growth Equities.

Please proceed with your question.

Hi, guys, thanks for taking my question.

You guys mentioned Atari's acquisition of Cryptic and your subsequent announcement to not publish Champions on-line.

Previously MMO has been an area of opportunity and focus that you guys have mentioned.

Just wondering what's the focus there, whether there's still focus there going ahead, what's the game plan with the MMO space.

And in terms of its impact on the guidance reduction, can you give us some color on how big of an impact that was?

Thanks.

Thanks, Leo, for your question.

Look, MMOs remain a strategic focus for us.

This has been a partnership, we'll always been a publisher and not much more than a publisher of the game.

MMOs typically is a great opportunity in Asia and this was primarily a U.S.

oriented type of game.

If you looked at the content, it was a U.S.

oriented type of game.

For a number of reasons that I would prefer not to go into, it became less attractive over time and when Atari bought the Company it became important and critical that we just -- we announced our intention not to distribute the game.

So with respect to kind of the impact on '09, I don't think we can comment on it and I'd prefer not to.

Thank you.

To be clear, this is initial guidance.

There is no guidance reduction.

I think we --

This is initial guidance.

We've got some confusion in the past about what's going on here.

We never gave guidance for 2009.

This is our first guidance for 2009.

And we've met or exceeded guidance historically in terms of our operating results, we've met or exceeded guidance the last six quarters that we've been here.

And so I want to be careful about guidance versus -- missing guidance or -- we don't have an obligation to meet the guidance that analysts set for us.

We have an obligation to an obligation, but we think it -- we believe it's our responsibility to inform shareholders where we think the business is going and that's what we're doing.

We have not missed guidance.

Right.

Got it.

Thanks, guys.

We have time for one more question.

I'd like to -- our next question comes from the line of Edward Williams with BMO Capital Markets.

Please proceed with your question.

Hi, guys, this is Tom Andrews standing in for Edward.

Couple questions if I could.

For '08 can you go over what your cash R&D spend was and what do you expect it to be for '09 and also what was your R&D head count at the end of the year and what do you expect it to be for the end of the current year?

And can you elaborate at all on your plans to take advantage of the Wii in terms of what new brands you might be introducing and when we might see that.

In terms of the R&D head count, we had about 1,500 employees in R&D at the end of the year.

We don't comment on forecasted employees.

But we do intend to grow our studio and our development employees going forward and focus on development of our current titles and new titles.

And in terms of cash spend for R&D, we also -- we don't share that specific information either.

And with respect to the Wii, we've got a bunch of sports titles that are going to take advantage of the Wii.

Some of our best content really isn't appropriate for the Wii.

That said, Carnival Games has been a massive success for the Company.

And we're looking at, in a disciplined way, extending that brand to other areas.

And as I said, our sports -- all of our sports titles are looking at the Wii as a potential platform.

Frankly even at the content that -- the M rated content that we think is much more appropriate for the PS3 or 360, we have to look at the Wii as a viable platform across all our labels.

We have to because you can't ignore the install base.

You just can't.

And we're going to do a lot of learning with GTA IV -- GTA Chinatown Wars, excuse me, on the DS in terms of bringing that kind of content to a Nintendo platform.

Our partnership with Nintendo is as strong as it's ever been.

We're excited about it.

We talk to them all the time.

They provide great feedback for us.

We're highly focused on it.

That said, I think you see on our release schedule those titles that we've announced for 2009.

Thanks.

Maybe just one last thing is when you looked at the -- when you looked at the upcoming year or fiscal '09, what kind of a revenue contribution do you think we could expect to see from downloadable content this year and what portion of that do you think might be for Grand Theft Auto.

We don't break that out.

Okay.

Thank you.

Thanks to everyone for joining us today.

I would also like to take a moment to thank all of our colleagues for their hard work and dedication in what is the Company's record year.

We greatly appreciate everyone's efforts.

This is a team effort.

The team has performed at the highest level this year and it's incredibly gratifying to all of us.

So on behalf of the Company, we would like to wish all of you a happy and healthy holiday season and new year and we look forward to speaking with you soon.

Thank you.

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

Thank you for your participation.

You may disconnect your lines at this time.