Take-Two Interactive Software Inc (TTWO) 2009 Q2 法說會逐字稿

Greetings, and welcome to the Take-Two Interactive Software second quarter 2009 results.

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

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

(Operator Instructions).

As a reminder, this conference is being recorded.

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

Thank you.

Welcome and thank you all for joining us today for our second 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.

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

These important factors are described in our filings with the SEC including our 10-K for the fiscal year ended October 31, 2008, and our 10-Q for the first quarter ended January 31, 2009.

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

Now I'll turn the call over to Strauss.

Thanks, Cindi, and good afternoon everyone.

Today we'll review our financial results for the second quarter and discuss operating highlights, our upcoming product lineup and initial guidance for the third and fourth quarters.

Take-Two's second quarter results were better than the guidance we provided in March.

We delivered higher than expected revenue and a quarterly loss lower than our guidance range.

We're pleased that this is the eighth quarter in a row in which we've met or exceeded our guidance.

We fully recognize that our organization has to stay focused on executing our business plan for the balance of this fiscal year as we gear up for a very busy fourth quarter.

We expect our current quarter to be challenging as a result of a light new release schedule, that's reflected in the third quarter guidance that we provided today.

We're maintaining a prudent approach to our business.

We continue to believe that our fiscal 2009 guidance is appropriate for what remains an uncertain economic environment.

In addition we expect our fiscal year revenue and earnings performance to be strongly weighted toward the fourth quarter.

Some recent reports have indicated that the economy may be starting to stabilize and consumer confidence may be strengthening.

The retail environment does appear more stable since our last call.

Consumers are continuing to spend, albeit cautiously, and retailers remain interested in our titles while keeping a close eye on inventory levels.

Our catalog business remains strong and our industry continues to show resilience, specially as compared with other consumer sectors.

We're encouraged by these trends and believe we can increasingly capitalize on them in the near term by leveraging our proven intellectual property and catalog and exploring additional cost savings initiatives this fiscal year and beyond.

Thou way like to turn the call over to Ben.

Thanks, Strauss.

Today we reported net revenue for the quarter was $229.7 million, and non-GAAP net loss was $2.9 million, or $0.04 per share.

This compared to revenue of $539.8 million and non-GAAP net income of $115.4 million, or $1.52 per share for the second quarter of 2008.

It's important to note that these results for the prior year reflected the phenomenal success of Grand Theft Auto IV which broke all records for the launch of a video game and generated more revenue in its first week than any other entertainment product in history, including movies.

Second quarter sales were led by Grand Theft Auto IV, The Lost and Damned, the critically acclaimed first episode of downloadable content for Xbox 360, Major League Baseball 2K9, Grand Theft Auto IV and Grand Theft Auto Chinatown Wars for Nintendo DS.

Our catalog was once again a strong contributor to our quarterly performance and continues to provide predictability and visibility for our business.

We ended the second quarter with $180 million in cash.

Lainie will provide further details about the quarter in a moment.

I'd like to recap some of our recent business highlights.

We released Grand Theft Auto Chinatown Wars exclusively for the Nintendo DS.

This is the highest rated DS game of all time according to Meta Critic.

It has quickly become the highest unit selling M-rated game in the history of the DS in the U.S.

through April according to NPD.

We're very proud of that game's new benchmarks for innovation and quality on the handheld platform while helping to pioneer the development and distribution of mature games on the DS.

We believe that renowned franchises such as Grand Theft Auto and high quality titles such as Chinatown Wars can help grow that segment of the market.

We're confident that Chinatown Wars will have a long life in the market as we've seen with our other Grand Theft Auto titles.

We released the first downloadable content for Midnight Club Los Angeles for both Xbox 360 and PlayStation 3.

The south central premium upgrade available for $9.99 includes a whole new section of L.A.

together with new cars, races, music and other features that significantly extend the street racing experience.

We've also made new cars available via micro transactions that enable players to purchase packs that include three vehicles and import them into their game experience for $3.99 per pack.

Rockstar announced Max Payne 3, the sequel to our successful franchise has sold over 7 million units worldwide.

The game is slated for release in winter 2009.

2K Sports shipped Don King Boxing for Nintendo Wii and DS.

2K games shipped Sid Meyer, Civilization IV, the complete edition for Games for Windows in North America.

This definitive collection delivers the complete Civilization IV experience in one value priced package developed by 2K's For Access games, the Civilization franchise has sold more than 9 million units worldwide.

2K play announced that our Cap Daddy game studio, the team behind our 4 million unit selling Carnival Games franchise, is developing two new family entertainment products.

Titles for the Wii and DS based on the world renowned Ringling and Barnum and Bailey Circus and our internally owned Birthday Party Bash title will be released exclusively for the Wii.

Today we announced several changes to our 2009 release schedule.

First, we're excited to add a new title for Rockstar for the Xbox 360 entitled Grand Theft Auto Episodes from Liberty City which is a great new offering from our most successful franchise.

Second, we're moving Mafia 2 and Red Dead Redemption to fiscal year 2010 to allow additional development time for both titles and to deliver the most engaging consumer experience possible.

We expect both titles to ship during the first half of fiscal 2010.

We're currently evaluating the best launch window for the titles.

Our diversified portfolio provides us the flexibility to give certain products more development time and others a chance to enter the market in an earlier, more opportunistic window.

Finally, we appointed Manny Sousa as our Executive Vice President and head of Human Resources.

Manny is responsible for overseeing is our global HR strategies and practices in this newly created position.

This is a critical role in a people oriented business such as ours, and we're confident that we'll benefit from Manny's 20 years of Human Resource management experience.

He joins us from T-Mobile where he served as their Chief Human Resource Officer and member of their executive committee.

We're pleased to have Manny join our senior management team and believe he will play an important part in helping Take-Two reach the next level.

Looking ahead to balance of the year we remain confident that our strategy of producing a select number of AAA titles while continuing to be disciplined and efficient in our operations is the right approach for both our business and the current market conditions.

We believe that our portfolio is perfectly suited to meet consumers demands for both quality and value.

Let me take you through our pipeline for the balance of 2009.

Today we announced that Rockstar will launch the second downloadable episode of Grand Theft Auto IV for Xbox Live entitled the Ballad of Gay Tony.

Developed by Rockstar North this episode features Rockstar's trademark sense of humor, no holds barred characters and players will assume the role of Luis Lopez, a part-time hoodlum and full-time assistant to legendary night club impresario, Tony Prince, a/k/a Gay Tony, as he struggles with the competing loyalties of family and friends and with the uncertainty about who is real and who is fake in a world in which everyone has a price.

Grand Theft Auto, the Ballad of Gay Tony is set to release this fall for $19.99, or 1600 Microsoft points and will require players to have the full version of Grand Theft Auto IV for Xbox 360 and Xbox Live membership.

Rockstar will simultaneously release Grand Theft Auto episodes from Liberty Cities, a new exclusive Xbox 360 title comprised of the critically acclaimed the lost and the damned and the all new episode, the Ballad of Gay Tony, together on one single disk this Fall for $39.99.

Grand Theft Auto episodes from Liberty City will not require the players to have the original version of Grand Theft Auto IV.

We're excited about the opportunity to extend the audience for this terrific content.

Rockstar is planning to release Beaterater this fall which features a powerful and intuitive music mixer that gives gamers a fun way to create their own music and unique beats.

Beaterater will also offer a highly addictive collection of additional music to downloadable add ons.

In our first half of fiscal 2010 Rockstar plans to release Red Dead Redemption, the sequel to their 2004 hit, busted epic Red Dead Revolver -- which sold 1.5 million units.

Red Dead Redemption is a game that brings Rockstar Game's record breaking open world game play and attention to detail to a brand-new western setting.

The response to the debut title was very strong and pre orders are starting to build.

Moving to 2K, Borderlands, an exciting new Sci-Fi franchise from acclaimed developer Gearbox is planned for release this fall.

The studio has revealed their new hand shaded arts style for the game.

We believe the game will introduce a new gaming genre, role playing shooter, or RPS.

The excitement continues to grow for our upcoming release of BioShock 2 from 2K games as this sequel has been already featured on more than 35 gaming publications covers worldwide.

2K recently announced exciting new multiplayer features for the game in response to strong demand for fans of the franchise.

We believe this new dimension of game play will appeal to both current and new fans of BioShock.

We expect that the game will ship in October and be in stores in Europe on October 30, and North America on November 3.

2K Sports will release the Bigs 2, the highly anticipated sequel for their arcade style baseball game on July 7, on all of the major hardware platforms.

MLB All Star Prince Fielder of the Milwaukee Brewers is this year's cover athlete for the game.

Our 2K Sports teams are continuing to build -- continue their development of of NBA 2K10 and NHL 2K10, both due out this fall.

These games will be on all of the major platforms for the first time and our hit NBA 2K franchise will be available on the Nintendo Wii.

Our Cap Daddy studio is hard at work on Birthday Party Bash, a new internally owned family entertainment brand coming to Nintendo Wii in July.

The game offers parents a fun, interactive way to host an in-home birthday party that can can be customized for their children.

We think that this game -- this is the perfect time for a game that will help make home parties more affordable and fun and provide great value for families.

2K Play has partnered with some of the biggest brands in the birthday business including Duncan Heinz, Party City and E-Vite to offer fantastic all in on party product.

Cap Daddy is also developing games for the Nintendo Wii and DS based on the world renowned Ringling Brothers and Barnum and Bailey Circus planned for release this fall.

We're very excited about all these titles, many of which will be on display at E3 next month.

In addition to the areas that we've discussed today, we are continuing to pursue opportunities for growth and increased profitability.

We believe there's potential to further expand our business by leveraging by successful IP and catalog.

We also are continuing the prudent management of our business by exploring cost cutting beyond those already included in our model.

Longer term we're investing, in tools, technologies, and talent that will enable us to continue to scale our business for growth.

This effort focused on positioning Take-Two for exciting new opportunities in markets that we believe will deliver benefits to our Company and our shareholders.

While the economy remains a challenge for our business, we believe that Take-Two has the creative talent, the portfolio of proven franchises and the fiscal discipline to navigate these times and emerge as an even stronger global Company.

With that I thank you and would like to turn the call over to Lainie.

Thanks Ben, and good afternoon, everyone.

Today I will review our second quarter results, and then discuss our outlook for the balance of the year.

Net revenue was $229.7 million in the second quarter compared with $539.8 million a year ago, reflecting the launch of Grand Theft Auto IV.

Non-GAAP net loss is $2.9 million or $0.04 per share compared to non-GAAP net income of $115.4 million or $1.52 per share last year.

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

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

The quarter's revenue drivers were The Lost and Damned, Major League Baseball 2K9, Grand Theft Auto IV and Grand Theft Auto Chinatown Wars.

There are several factors that led to better than expected results.

The variety of our titles exceeded our forecast including Grand Theft Auto IV, NBA 2K9 and Carnival Games.

Our catalog business was very strong again this quarter representing nearly 50% of our publishing revenue.

The higher than anticipated revenue was partially offset by lower than expected gross margins, due to the product mix of both our publishing and distribution businesses.

On the expense side, our marketing expense is lower than we forecast, primarily due to the timing of some advertising campaigns which we moved to Q3 and Q4.

G&A expense is also lower than expected, primarily due to our cost cutting initiatives and a decrease in performance based compensation expense.

As compared to guidance, our bottom line non-GAAP results were also favorably affected by an $0.08 reduction in our tax provision.

This is driven by the resolution of specific uncertain tax positions during the quarter partially offset by tax expense for our international business.

Our GAAP results for the second quarter were a net loss of approximately $10 million or $0.13 per share, compared with net income of $98 million or $1.29 per share in the second quarter of 2008.

Our GAAP results this year included $5.3 million in stock-based compensation expense, and $1.8 million of professional fees and expenses related to unusual legal matters.

Looking at consolidated results, our non-GAAP gross margin for the quarter was 30.5% compared to 42.2% in Q2 of last year.

When Grand Theft Auto IV represented a significant percentage of our revenue.

Our gross margin this quarter was also affected by the factors that I mentioned earlier.

Excluding our sports and distribution businesses, our split between North America and international revenue was about 60% to 40%.

Non-GAAP operating expenses in the second quarter were approximately $77 million, down significantly from last year's second quarter and also from Q1 of this year.

Sales and marketing expenses accounted for the largest decrease of nearly $15 million compared to Q2 of last year, primarily due to the launch last year of Grand Theft Auto IV which had a significant marketing budget.

2K's marketing expenses were also lower this year and our European sales and marketing expenses were lower due to performance based compensation and foreign exchange effects.

G&A decreased by $13 million from Q2 of last year due primarily to lower bad debt expense and performance based compensation expense.

We also realized as a result of our cost cutting initiatives reduced personnel expenses in Europe and lower consulting and professional fees.

A portion of the decrease is due to foreign exchange effects.

Depreciation and amortization also decreased by $2.7 million year-over-year due to the sale of a warehouse in connection with outsourcing our distribution services in the U.S.

(inaudible).

Moving on to our balance sheet, at the end of Q2 we had $180 million in cash, including $70 million from borrowings on our credit line.

Our accounts receivable reserve was about $49 million at the end of the quarter or approximately 49% of gross receivables about the same as the first quarter.

The reserve percentage is higher than historical levels primarily due to increased amounts of price rejection required in the current economic environment.

Inventory at the end of the quarter was approximately $74 million, down significantly from last year when we had higher inventory to support the launch of Grand Theft Auto IV.

It also reflects our continued focus on reducing the number of SKUs and inventory level at (inaudible) Games to maximize margins in the business.

Software development cost and licenses were up about 5% year-over-year, while we amortized a significant amount of software development costs in the past year as a result of our Q releases, we have also capitalized costs related to our upcoming releases.

We currently have 35 tiles in various stages of development.

Now to our outlook which is provided on a non-GAAP basis.

We're updating our fiscal 2009 guidance slightly based on our Q2 actual results.

And to reflect the released schedule changes we announced today.

Based on our new release schedule we have slightly lowered our fiscal 2009 revenue range, however, we have maintained our full year EPS estimate, (inaudible) various updates to our model including expectations for certain titles, additional cost cutting initiatives and a reduction in tax expense for the year.

As we said previously our release schedule is heavily weighted towards the fourth quarter and maintaining our release schedule is critical to achieving our fiscal year numbers.

Our results may also be affected by variability and foreign exchange rates which are difficult to forecast.

For the full year we expect non-GAAP earnings per share in the range of breakeven to $0.20 and $1.05 billion to $1.15 billion in revenue.

This excludes stock based compensation of $0.24 per share and expenses related to relate to unusual legal matter of $0.11 per share.

I'll review the key assumptions underlining our fiscal guidance which differs slightly from what we provided on our last conference call primarily due to the changes in our release schedule that we announced today.

We expect our overall mix to be about 75% from publishing, and 25% from distribution.

The mix of our publishing business will be about 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.

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

We expect 2009 G&A levels to improve by approximately 15% in absolute dollars compared to 2008, primarily due to our cost savings initiatives, reduced personnel and performance based compensation expenses along with changes in foreign exchange rates.

Sales and marking expense is expected to decline about 10% year-over-year.

R&D will grow about 5% due to the continued investment in our development studios and the full year cost of our new studios.

Depreciation and amortization should decrease by about 20% due to the sale of our warehouse in connection with the outsourcing of our distribution services in the U.S.

(inaudible).

Based on our current forecast we now expect our tax expense to be approximately $2 million in fiscal 2009.

Our estimates reflect tax expense primarily related to our international business, partially offset by the resolution of specific uncertain tax position in the second quarter.

We are issuing initial guidance today for the third and fourth quarter.

For Q3 we expect non-GAAP net loss in the range of $0.55 to $0.65 per share on $145 million to $165 million in revenue.

This excludes stock-based compensation expense of $0.07 per share and expenses related to unusual legal matters of $0.01 per share.

For Q3 our key releases are The Bigs 2 and Birthday Party Bash.

I'd like to provide some of the additional functions behind our Q3 outlook.

We anticipate our revenue mix to be about 70% from publishing, and 30% from distribution.

Reflecting our our light release schedule.

This will reduce gross margins which are expected to be in the low twenties.

Margins will also be effected by a large revenue contribution from The Bigs 2, part of our Major League Baseball license as well as a significant percentage of revenues from catalog titles.

We expect operating expenses to be about flat in all categories in Q3 as compared to Q2.

Based on our forecast we expect to show a small tax expense, primarily reflecting earnings in our international territories.

Moving on to Q4, our Q releases are Beaterater, BioShock 2, Borderlands, the new Grand Theft Auto title we announced today exclusively for Xbox 360, Grand Theft Auto Episodes from Liberty City, the second downloadable episode of Grand Theft Auto IV for Xbox Live that we announced today, The Ballad of Gay Tony, NBA 2K10, NHL 2K10, and Ringling Brothers and Barnum and Bailey Circus.

For Q4 we expect non-GAAP net income in the range of $1.08 to $1.28 per share and 420 million to $500 million in revenue.

This excludes stock based compensation expense of $0.06 per share and expenses related to unusual legal matters of $0.01 per share.

Our large Q4 release schedule should result in a revenue mix of about 85% from publishing and 15% from distribution.

We expect gross profit margins to increase into the high 30s in that quarter.

We expect overall operating expenses to increase in Q4 as compared to Q2 and Q3, primarily driven by higher sales and marketing expense plus the the launch of Q4 and holiday season.

These expenses are likely to be up by 50% or more from Q2.

G&A, R&D, and depreciation and amortization should remain relatively flat in Q4 as compared to Q2 and Q3.

Based on our forecast, we expect to show a small tax expense in Q4 primarily reflecting earnings in our international territories.

Let me conclude by saying that our teams are working diligently to enhance our performance for fiscal 2009 and beyond by pursuing revenue opportunities that leverage our strong catalog of titles as well as identifying and implementing further areas of cost savings.

Now I'll turn the call back to Strauss.

Thanks, Lainie and Ben.

I'd like to close by saying that we remain committed to executing on our strategy of being the most innovative, the most creative and the most cost effective Company in our industry.

We'll now be happy to take your questions.

Operator.

Thank you.

(Operator Instructions).

Our first question is from Daniel Ernst with Hudson Square Research.

Please go ahead with your question.

Thanks for taking my call.

Two questions, if I might.

On the decision or the announcement today to release the two episodes or the two outside contents for GTA on disk as well as downloadable content or to suggest about the opportunity for the pure digital market, in other words, was your experience with the first one such that you and Microsoft decided that in order to reach a broader audience you need to make it available in both physical media and online in order to get the best value for the buck?

Then second question, on the move of Red Dead and Mafia into the next fiscal year, to what extend was that the need for more development time versus the need to balance the calendar a bit more?

And if it's the need for development time is there any risk to the assumption that you will be in the first half versus maybe even pushed out further than that?

Thanks, Dan this is Ben.

On the question of the announcement of the downloadable disc we're quite pleased with the performance, downloadable performance on the first episode, we've also seen opportunities and demand at retail, both channels are important to us and so while we're pleased with the download we saw an opportunity to take advantage of at retail as well, we're pretty excited that this title will sell a great deal number of units and it's one of the reasons that we were so excited to bring it to market this Christmas.

With respect to the development time we have a pretty firm policy at Take-Two about serving no wine before its time.

The development cycles require more time, we're highly dedicated to quality and we'll give it the time it needs.

Our ability to move a title into the year as well still reflects how far Take-Two has come in its diversity of its product line, its flexibility to move titles in and out to meet not only corporate goal, but the consumer goals and development goals.

In terms of the final part of your question, whether it's going to slip out any further than what we've announced, we don't anticipate that, otherwise we wouldn't have announced the date or the release window as we have.

We believe that both of the games are superb, our gaming experience and superb quality, we simply just wanted to make sure that it had the right level of gravitas behind the games.

Now we know that Christmas is a competitive season but most of what's driving all of this is just simply the games, making sure the games are developed in the right quality and the right way.

The next question is from Heath Terry with FBR Capital Markets.

Mr.

Terry, your line is live.

Please go ahead.

Great, thank you.

First I was wondering if you could give us a sense of what your expectations for industry growth for the remainder of this year are and to what extent that they've changed?

Then on BioShock 2 I notice that it's still being listed in your upcoming schedule as platform TDA, should we read anything into that?

Is that a title that could potentially end up being the various for it released at different times or is there some other reason for that?

Well, Heath, the industry growth question, we don't provide that information publicly.

We have internal numbers that we use to build our forecast but we don't speculate on the industry growth.

In terms of BioShock, we are still working out what the right views are and the right timing, so we're just not ready yet to announce that information.

But no you shouldn't read anything into that.

We feel real good about the way it's coming.

Great, thank you.

The next question is from Mike Hickey with Janco Partners.

Please state your question.

Thanks for taking my questions.

Given the delays here of Red Dead and Mafia 2 it looks like, from a release core BioShock is going to be even more weighted than it was originally and maybe I'm wrong there but if you can clarify the importance of BioShock and why you believe at this time that this game will be able to produce, if you can remind us what it did in its original release period that would be great.

The original title on just the one platform, the approximately 2 million units, about, a little bit over that about 2.2 million units.

And then we had the additional titles go out on PlayStation 3 as well as the PC, and so it's up to about 3 million units at this point.

But it was a staggered release so it's a little bit different this time around, we're feeling great about the title, it looks fantastic, the previews have been really great, and the development team has done an unbelievable job so we are excited about that title.

And it's a multiplayer version which is different than the original version as well.

So that really makes it stand apart.

And is it too early to see pre orders on this game or is it--?

Yes.

It's early for us to start discussing that.

In terms of Q4, the new SKU from Rockstar is real exciting for that quarter as well.

If you think about, as we're getting closer to that quarter, if you take a look at the titles and the information that we're gaining on what the titles are to get better numbers for our guidance and that sort of balances our the two SKUs moving out of the quarter.

Just to clarify, on the new SKU that's basically GTA 4 plus the two downloadable content.

Most of the market has been served in terms of initial 2K4 sales right?

That's not accurate.

It's actually the two episodes and you don't need the original game in order to buy them.

So if you assume that the universe of console owners is greater than the universe of live users and I think it's a fair assumption, there are people who -- for whom having the opportunity to buy these two episodes, which are terrific, we believe, first one is by definition, second one we feel just great about.

It's a great opportunity for consumers who have not been able to buy these on Xbox Live.

You don't have to have the original title, which is an important element of this.

So we think it's going to be hotly anticipated, and this is all new content.

Okay, and then just do you have any rough range of what the loss on The Damned, I know you guys are happy with its performance, can you give us a rough--?

We're not disclosing those numbers.

It is not our typical practice that we would.

The ratings are extraordinary and we're filled with the way it's performed and we couldn't be happier with it.

Thanks, guys.

The next question is from Eric Handler with MKM partners.

Please state your question.

Hi, thanks for taking my call.

Just a quick question on your expenses.

You're identifying some cost cutting opportunities, can you give us a sense of how large that ultimately may be?

Eric, we're not really ready to discuss them specifically yet.

We have some of our cost cutting initiatives already included in our numbers, as we solidify them and start to implement, then we had a them into our guidance model.

So the ones that we have not moved into our model yet we have not announced exactly what they are, but we feel there's a lot of opportunity within our business to look at ways to streamline the operations and become more efficient.

Can you at least say where some of these cost cuts have come from?

Well, the ones that are included in our cost cutting, we've been seeing them come through our numbers in the last couple quarters.

So really, they're in our G&A numbers, they're also in our warehousing, in some of the outsourcing arrangements that we've done.

So there's been a lot of different efficiencies that we've added into the business over the last year.

Thank you.

The next question is from Tony Gikas with Piper Jaffray.

Couple questions.

Could you repeat the BioShock launch dates and retail dates, and how will that hit -- it sounded like it was right at the end of the October quarter.

Did you say the domestic shelf date was in November?

So you how will the revenue recognition -- will it all hit the October quarter, the initial launch, or it will be staggered between the two quarters?

Then do you have a cash flow expectation number for the year?

Hi, Tony.

It's Lainie.

For the shipping of the BioShock product, we expect it to be in the stores in Europe on October 30, and North America on November 3.

So we do expect it to be a fiscal 2009 number.

So we expect to recognize revenue at least for the launch quantities during the fiscal year.

And then the second question was about cash flow?

Do you have a cash flow estimate for the year?

We don't provide that information on a guided basis.

We were at $180 million at the end of the quarter, and we have drawn $70 million on our credit facility.

No, I'm sorry, cash flow estimate for the year?

We don't provide that information.

Okay.

Could you repeat the gross margin assumption for the third quarter?

I missed that.

It's going to be in the low 20s.

And the last question, you talked a little bit about the outsourcing of the distribution business.

Can you talk about what specifically -- what changes have occurred there that you're outsourcing that business now?

Sure.

We used to own our own warehouse, and we had all the employees, and we did our own pick, pack and ship operation through our Jack of all games business, and we've -- about nine months ago now we outsourced the operation to Dyton, and we reduced our costs and reduced the complexity of the operation for the Company.

And it's your intention to continue to maintain that business going forward?

The Jack of all Games business?

The distribution business, correct.

Yes, the outsourcing is the pick, pack, and shipping of all of our publishing and distribution products.

So Jack of all Games is a distribution business, and that's separate from the pick, pack, and shipping of our product.

Okay.

Last question real quick.

Will the combined episodic content that's coming on the disk for $39.99 require a payment to Microsoft other than just the typical manufacturing fee?

I don't think we can discuss the details of that at this time, but it is a retail SKU.

So it probably will be similar to how we handle retail SKUs.

Thank you, guys.

(Operator Instructions).

The next question is from Edward Williams with BMO Capital Markets.

Please state your question.

Good afternoon.

Couple questions.

First of all, can you give us an idea as to what the development headcount is currently and what your expectations are with the heads in the studios through the balance of the year?

Ed, we have about 1600 right now for studios.

We don't have -- we don't give out the projected number by the end of the year.

We've definitely grown it during this year based on the capacity and the products that we have in the line.

We'll continue to grow it as necessary to get our products to market and to get the best quality out of our product.

What was heads at the beginning of the year?

I think we were around 1500 per development studios, and it's grown to 1600, approximately 1600 right now.

How significant is 2K Shanghai at this point?

We don't speak about headcount by location specifically but it has grown slightly over last year.

In terms of significance it's an important part of our operations, and we're very pleased to be in business there.

It's worked out well.

if we were to look at downloadable content, how should we think about it on two sides of it?

How should we think about the economics of it, to the extent you can give us some color relative to, say, the traditional retail business?

And then secondly, how significant is it as a percentage of sales, or what's the growth rate should we look for on a go forward basis?

Without going into specifics on how we're accounting for in our margins for it, we can tell you that when we recognize the revenue for the episodic content we are pairing with it our capitalized software amortization and the associated marketing.

So that's how it's going through the P&L right now.

And in terms of it as a product and how big it is, we don't comment on specific title by title basis for GTA or any of our other titles, but GTA as a franchise for the quarter was 90 million in sales which was approximately 50% of our net publishing sales for the quarter.

Ed, if I may also, GTA -- I assume your question was about GTA, but generally downloadable content is a big word and it means a lot of different things to a lot of different people.

The reason it does is because most of the publishers are innovating around downloadable content.

As far as we're concerned, retail opportunities is kind of the primary channel for the foreseeable future, and the idea of providing downloadable content as kind of added value to consumers is what's driving most of the innovation.

Consumers demand it, we want to deliver it, and the economics of it I don't think should be seen as distinct from retail.

They should be seen in cooperation with retail as kind of a single package of retail and service on the back end but it's all one single experience that consumers seem to be demanding.

Great.

The last question along those lines is, if we look at your major releases from the 2K group and Rockstar group, how many of them, or what sort of percentage of them do you think will have downloadable content associated with them?

How critical do you see it for your ongoing releases?

I would say I kind of -- for us it's kind of downloadable content, multiplayer, all the added content and service we put on the back end is something we put in one bucket, and different games will require a different mix of downloadable content or multiplayer or some -- something along that general theme.

Almost all will have something.

Very few will have nothing, and the actual mix between those is kind of game by game.

Not sure we're ready to discuss that yet.

It's part of the marketing campaign.

So you should expect to see almost everything that we have having some component on the back end, because that's what we think consumers demand.

Okay, great, thank you.

The next question is from Ben Schachter with Broadpoint Capital.

I wonder if you could give us an update on the sports business and how it's changed year over year?

Maybe start with baseball, but also what you expect from the others.

If you could also update us on what is the actual status of the Hauser, the new entity from Hausers?

Has that gotten going yet?

Is there anything in development there?

Thanks.

I'll take the question on the sports -- it's Ben Feder, as distinct from Ben Schachter.

Sports, our sports business profitability is a key goal.

An important factor is the performance of the sports is the quality of our games.

We had high expectation this year.

Last year we shifted development from Major League Baseball 2K9 to visual concepts.

That's the same studio that develops our highly rated and profitable NBA titles.

The shifting development takes the studio some time to show some progress.

In the long term we think that will help build the baseball franchise over time.

We continue to leverage our baseball license in a variety of new ways, and a variety of new titles, including The Bigs.

So I wouldn't jump to any conclusions about the results of NBA -- sorry, about Major League Baseball 2K9, The Bigs so far is looking pretty good and we think that can help lift the baseball business this year.

We're highly committed to the sports business.

We're highly committed to baseball.

We're contractually committed to baseball and I don't see any changes happening there.

NBA is an unbelievable franchise.

I think at this point in the cycle we think we can declare dominance in that area.

That's not to say we're going declare victory and sit on our laurels but we think we have fantastic momentum with fantastic product and it's one of the crown jewels of the Company at this point.

So we're committed -- when it comes to where we can compete, genres we can compete with authority and with definitive competitive advantage I would include sports and specifically basketball, right there in the sweet spot.

Just in the way that we compete, the highly effective baseball in kind of the urban genre, for lack of a better word, where GTA competes.

Without mincing words, we're making progress every day, we're highly committed, and we know we have issues with some of our specific titles, and we work on them by applying our best development talent.

Is there anything going on in the Wii that make you more optimistic on how some of these titles can do on the Wii this year?

Well, we're putting NBA on the Wii as you know, as we announced today.

That's a big installed base for a fantastic franchise.

So we're pretty excited there.

The Wii is going to become more and more part of -- all of our sports titles need to be multiplatform.

And the Wii is obviously a platform that needs to be part of that.

As we said over and over again on these calls, Nintendo was a terrific and important partner for Take-Two, and we expect that to continue over time, and especially in our sports business.

And on your question about Rockstar, first of all, I think it's worth noting that this label continues to turn out extraordinary products that get extraordinary ratings and resonate in an extraordinary way with consumers, and that's the primary objective of the label, and they're doing a phenomenal job.

It's really incredible.

Everything they put out achieved these off the charts ratings, and we should never, none of us should take that for granted.

It's awfully hard to do.

They remain very focused on the upcoming releases and those releases are wholly owned intellectual property.

We just couldn't be happier with the partnership and the way that it's progressing.

I think all of us are going to be blown away, and our consumers will be delighted by these upcoming releases.

In terms of your question about the possible future opportunity for an intellectual property that's de novo, to be produced by another studio, that still remains an opportunity for the folks who run the label.

It's not an operational opportunity at the moment and I would say, our focus is on our partnership and the great things that that label is doing, and here on the 6th floor focuses on whatever opportunities we have to enhance their ability to bring these great titles to market.

Great, thanks.

There are no further questions in queue.

I would like to turn the call back over the management for closing remarks.

Thank you all.

As you know, these are challenging times for a lot of people out there.

We're not unmindful of that.

I think it's worth taking a moment to congratulate our team and all of our colleagues all over the world for staying focused on our plan and executing against our strategy.

It's sometimes hard to stay focused when times are tough, and times are tough for your families and your friends, and everyone here has, and we're immensely grateful.

We feel good about the way the year has progressed, and we feel great about our titles and we fell cautiously optimistic about remainder of the fiscal year.

Thank you very much.

This concludes the teleconference.

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