Take-Two Interactive Software Inc (TTWO) 2009 Q3 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Take-Two Interactive Software Q3 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, Ms.

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

Thank you, Ms.

Buckwalter, you may begin.

Thank you.

Welcome and thank you all for joining us for our third 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 second quarter ended April 30, 2009.

These documents may be obtained from our Web site at www.Take-Two games.com.

Now I will turn the call over to Strauss.

Thanks, Cindi, and good afternoon, everyone.

Today we'll review our financial results for the third quarter and discuss our operating highlights, our upcoming product line lineup and outlook for the balance of the fiscal year.

Take-Two's third quarter results were in line with the guidance that we provided in July.

Or top line results were slightly better than our guidance due to higher than expected revenue from catalog titles.

Recent reports have confirmed that the US retail environment for interactive entertainment have not significantly changed since our last call.

We are continuing to see weak consumer spending, slow adoption of hardware and caution on the part of retailers with respect to both their initial orders of new releases and inventory management.

Internationally we are seeing similar trends throughout Europe and Asia.

Now on a positive note, France and Germany have each reported modest economic growth and they've announced that they are officially out of the recession.

European hardware sales have held up reasonably well on the PS3 and Xbox 360, and we've seen a broadening of market demographics through further hardware adoption of the Wii NDS.

In the past month, we've experienced increased sales of our catalog titles in France and Germany which we think bodes well for upcoming AAA releases.

Our industry success is driven by hit titles and we believe that several key products from our Company and our peers will play an important role in driving the business this holiday season.

In Asia western titles are gaining share across the region as high quality entertainment products and strong production values are becoming increasingly important to these consumers.

China and Korea continue to enjoy exponentially year over year growth in online entertainment category and analysts have predicted that the market could exceed $5 billion by 2012.

We hope to benefit from the growth of this market through our partnership with Tencent to bring NBA 2K online to Asia.

While the overall software market in Japan has declined year over year there has been growth in the XBox 360 and Nintendo DS.

We've seen our presence expand significantly in the region driven by our proven brands and strong catalogue, including titles as Grand Theft Auto IV and Midnight Club Los Angeles.

There are many opportunities for Take-Two to capitalize further in this market including investing in online products and leveraging the strength of our proven intellectual property.

All that said, clearly this has been and continues to be a challenging year for our industry and for our Company.

We believe that a prudent outlook is appropriate and we are maintaining our guidance for the fiscal year.

Looking forward, we are very excited about our terrific holiday lineup.

The holidays historically have been the strongest sales period for our industry and we think that interactive entertainment will continue to be an important category this year.

We also believe that retailers and consumers will concentrate on AAA and value oriented titles, the two key areas of our portfolio and strategy.

We are pleased that both Sony and Microsoft have reduced the price of their systems and hope that will serve as a catalyst for continued growth of our industry and also help to expand the audience for our titles.

We are confident in our long-term outlook.

We have an exceptional pipeline of titles for 2010.

We have a strong balance sheet and remain focused on the efficiency of our business.

And we are both proud and pleased to work with many of the most talented people in our business.

Now I'll turn the call over to Ben.

Thanks, Strauss.

Today we reported net revenue for the third quarter was $139 million, and non-GAAP net loss was $50 million, or $0.66 per share.

This compared to revenue for the 2008 third quarter of $434 million, and non-GAAP net income of $71.5 million or $0.93 per share.

It's important to note that these results for our third quarter of 2008 reflected significant revenue from Grand Theft Auto IV which launched at the end of our second quarter last year.

Third quarter sales this year were led by the big two, Grand Theft Auto IV and Major League Baseball 2K9.

Our catalogue was once again a strong contributor to our quarterly performance, about 70% of our publishing revenue, and continues to provide predictability and visibility to our business.

We ended the third quarter with $175 million in cash.

I'd like to recap some of our business highlights for the quarter.

We enhanced our balance sheet by completing a$138 million offering of convertible notes.

This additional capital will allow to us react quickly to take advantage of opportunities that we may see in the marketplace for studio or IP acquisitions, strategic investments and other initiatives to grow our business and create shareholder value.

Underscoring our commitment to increasing our presence in Asia, 2K Sports expanded on its successful relationship with the NBA by securing a multi-year license to develop an online basketball stimulation game in China, Taiwan, South Korea and Southeast Asia.

2K Sports is partnering with Tencent Holdings Limited, one of China's largest online video game operators to co-develop the online version of our top selling and top rated NBA 2K franchise and distribute it in China and other key markets.

While we are only in the initial phase of this initiative, we are excited to be partnering with both the NBA and Tencent to extend the reach of our cornerstone sports brand.

2K Games released our first offering for the iPhone with Sid Meier's Civilization Revolution.

The game launched on August 10th and quickly became a number one selling game on Apples App store.

It has since remained among the top 25 selling titles across all applications in most territories.

We are very pleased with its initial performance which illustrates the power of our internally owned intellectual property to drive sales on any platform.

Internally owned IP provides us with the added benefit of creating new content at low incremental cost.

We look forward to selectively bringing more of our established franchises as well as new brands to the Apple platforms including the fall releases of Grand Theft Auto - Chinatown Wars and Rockstar Games in Timbaland presents Beaterator.

We exhibited at Gamescom in Germany which was hailed as the largest video game trade event in the world with a quarter of a million attendees.

We are very proud that Mafia 2 won for best PC game of the show and its developer 2K Czech also won for best developer.

We had thousands of consumers at our booth and received positive feedback from the European media and retailers for our titles particularly Grand Theft Auto, episodes from Liberty City and Borderland and Beaterator, as well as BioShock 2, Mafia 2 and Red Dead Redemption.

2K Sports launched a sequel to its popular Major League Baseball arcade franchise, the BIGS 2.

2K Games and Bethesda SoftWorks partnered to launch a value rich bundle of BioShock and the Elder Scrolls IV - Oblivion for the Xbox 360 and PC.

Turning to our operations, we recently completed our initiative to outsource entirely our inventory fulfillment services.

We now have an agreement with Cinram International to handle fulfillment for all of our Canadian business.

We expect this initiative to enhance the flexibility and efficiency of our business and offer a high level of service to our customers.

I've announce today we have reached an agreement in principal to settle a previously disclosed consolidated securities class action.

The litigation which dates back to 2006 is related to allegations of the reported hot copy content and historical stock options granting practices.

We are pleased to have reached this settlement and put this historical matter behind us.

Moving on to our holiday lineup, we are highly focused on delivering a diverse portfolio led by two new titles to Rockstar Games, Grand Theft Auto Universe.

On October 29 the Rockstar Games will launch Grand Theft Auto, Episodes from Liberty City featuring two standalone games on Xbox 360 for $39.99.

We think this title is perfectly timed and priced for the holiday season and will be a must have item for both retail and consumers.

Grand Theft Auto Episodes from Liberty City will include The Ballad of Gay Tony and The Lost and Damned, two unique gaming experiences with the trademark characters in action that can only be found in the world of Grand Theft Auto.

We will also simultaneously release The Ballad of Gay Tony on Xbox Live as a downloadable episode.

The Ballad of Gay Tony concludes a story art that began in Grand Theft Auto IV with a combination of exciting new game play content and new characters.

The first trailer launched today and will be supported by a comprehensive marketing campaign that will continue through the launch positioning Episodes from Liberty City as the brand new Grand Theft Auto experience for this holiday.

Rockstar will also release grand Theft Auto Chinatown Wars for the PSP, PlayStation Network, iPhone and iPod Touch.

We're proud to introduce this highly rated hand-held game on the PSP, a platform on which millions of fan have enjoyed GTA games.

The title is planned for release within the October launch window of the PSP Go and we expect to leverage the PR and industry buzz around the hardware introduction.

Award-winning studio Rockstar Leeds has expanded and enhances critically acclaimed titles to make it the fastest, most explosive portable Grand Theft Auto experience to date.

Additions for the PSP iteration of Grand Theft Auto Chinatown Wars include more visual effects for the wider high-definition screen, including more particle effects, dynamic lighting and shadowing, and higher resolution textures, a brand new character with a unique story thread, a variety of nonstory missions including rampages, and six new ingame radio stations featuring over 100 minutes of new music.

Grand Theft Auto Chinatown Wars is the ultimate distillation of the best experiences and features of a Grand Theft Auto title all rolled into Sony's powerful portable platform.

2K Games will release Borderlands on October 20 in the US and October 23 internationally.

This title has generated significant pre-launch excitement for both its unique art style and combination of first person and role playing action.

Developed by the talented team at Gearbox, Borderlands is poised to introduce a new game genre to our industry, the role playing shooter, or RPS.

Have already picked Borderlands to be the sleeper hit of this holiday season.

Later this month Rockstar will launch Rockstar Games and Timbaland Presents Beaterator for PSP and PlayStation Network.

The title will also be available for the iPhone and iPod Touch later this fall.

Building on the demand from consumers for personal music games but with a clear focus on genuine music creation, Beaterator will feature thousand of loops and sounds created by both Timbaland and Rockstar Games.

The title is being developed by Rockstar Leeds, the studio behind Grand Theft Auto Chinatown Wars, Grand theft Auto Liberty Cities and Grand Theft Auto Vice City Stories.

Beaterator will put the power to make professional level music at your fingertips in a format that's portable, acceptable and fun, allowing anyone to create great sounding music.

2K Sports will release NBA 2K10, marking the tenth anniversary of our number one rated and number one selling basketball franchise.

We are excited about this year's game which follows the critical and commercial success of NBA 2K9 that has sold over two million units worldwide.

Leading up to the launch of NBA 2K10, 2K Sports is offering NBA 2K10 Draft Combine, a downloadable experience for Xbox Live and PlayStation Network that allows gamers to create their own custom player, improve their skills through training and drills, and later import this player into NBA 2K10.

We think this is an innovative way to use downloadable content to provide a deeper gaming experience leading up to and throughout the launch of the game.

2K Sports will also release NHL 2K10, the latest installment of our hockey franchise.

This year's game will feature new online options and presentations, co-op game play, blog integration on 2KSports.com and a create-a-team mode.

The Wii version of the game is already garnering strong reviews scoring eight out of ten from Nintendo Power.

And for the first quarter ever, NHL 2K10 will support online play on the Wii as well as take advantage of Wii Motion Plus and Wii Speak Support.

Later thinking fall 2K Play will introduce Ringling Brothers and Barnum & Bailey Circus, and a new slate of Nickelodeon titles based on Ni Hao, Kai-Lan, The Backyardigans, and Dora the Explorer.

Looking ahead to next year, we have a strong lineup that includes sequels to some of our most successful franchises including BioShock 2, Mafia 2, Max Payne 3 and Red Dead Redemption.

We are continuing to evaluate the optimal release window for these titles and still plan to release all four titles in the first half of calendar 2010.

At this point we don't expect any of these titles to launch within our first fiscal quarter ending January 31, 2010.

We also have other new titles planned for the remainder of 2010 that will be announced in the coming months.

This Thursday night a new exclusive trailer for BioShock 2 will be appearing on Game Trailers TV with Geoff Keighley on Spike TV that will feature never before seen footage of the game's multi-player action.

We think it looks fantastic and will offer a taste of what have gamers can look forward to in the next year.

I want to emphasize that Take-Two remains very well-positioned with a strong balance sheet and one of the best portfolios of AAA intellectual property in our industry.

Our goals remain the same.

Explore and capitalize on new growth opportunities, continue to diversify our product portfolio, improve our efficiency and consistency of meeting release dates and set new benchmarks for innovation and creativity.

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

Thanks, Ben, and good afternoon everyone.

Today I'll review our third quarter results and then discuss our outlook for the balance of the year.

Net revenue was $138.6 million in the third quarter compared with $433.8 million a year ago.

Last year's Q3 results included significant sales of Grand Theft Auto IV which launched at the end of Q2 last year.

Non-GAAP net loss was $50.4 million or $0.66 per share compared to non-GAAP net income of $71.5 million or $0.93 per share last year.

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

As expected we had a relatively light new release schedule in Q3.

The quarter's revenue drivers were catalog titles, including Grand Theft Auto IV.

Other to that titles included The BIGS 2 and Major League Baseball 2K9.

Our GAAP results for the third quarter were a net loss of approximately $55 million or $0.72 per share compared with net income of $52 million or $0.67 per share in the third quarter of 2008.

Our GAAP results this year included $4.6 million in stock-based compensation expense and approximately $400,000 of professional fees and expenses related to unusual legal matters.

In looking at our consolidated results, our non-GAAP gross margin for the quarter was 17.5% compared to 41% in Q2 of last year.

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

Our gross margin this quarter was also affected by the following factors.

Distribution represented a higher percentage of our net revenues than in Q3 of last year, 31% compared to only 12% last year.

Sports represented a much higher percentage of our publishing revenue than last year.

We realized accelerated amortization expense related to our Major League Baseball license based on lower than expected sales of MLB titles for this year.

We also realized lower average pricing for several of our titles as well as a significant percentage of revenue from catalog sales.

Excluding our sports and distribution businesses, our split between North America and international revenue was about 50/50.

Non-GAAP operating expenses in the third quarter were approximately $69 million, down significantly from the prior year third quarter and also from Q2 of this year.

Sales and marketing expenses accounted for the largest decrease of over $17 million compared to Q3 last year, primarily due to the launch of Grand Theft Auto IV which had a significant marketing budget.

G&A decreased by $7 million from Q3 2008 driven by lower consulting and professional fees, reduced performance based compensation expense and our cost cutting initiatives.

A portion of the decrease was also related to foreign exchange effects.

R&D decreased by about $2 million primarily due to higher capitalization rates, foreign exchange effects also had a positive impact.

Depreciation and amortization decreased by $1.7 million from Q3 2008 due to last year's sales of certain assets in connection with outsourcing our US distribution services.

Moving on to our balance sheet, at the end of Q3 we had $175 million in cash.

Our accounts receivable reserve was about $44 million at the end of the quarter or approximately 39% of gross receivables, about the same as the third quarter last year.

Inventory at the end of this quarter was approximately $64 million, down significantly from year end due to seasonality.

Software development costs and licenses have increased in line with the significant development efforts around our AAA holiday and fiscal 2010 releases.

We currently have 37 titles in various stages of development.

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

We are updating our fiscal 2009 guidance slightly based on our Q3 actual results and Q4 forecast.

For the full year we expect non-GAAP net loss per share in the range of $0.81 to $0.87, or $975 million to $1 billion in revenue.

This excludes stock-based compensation expense of $0.30 per share and expenses related to unusual legal matters of $0.10 per share.

As we said previously, 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.

Moving on to Q4, we expect non-GAAP net income in the range of $0.30 to $0.35 per diluted share, on $350 million to $375 million in revenue.

This excludes stock-based compensation expense of $0.08 and expenses related to unusual legal matters of $0.01 per share.

We're refining our Q4 guidance range as we've obtained more visibility into Q4.

Since Q4 is forecast to be profitable, diluted EPS will reflect the impact of our stock compensation plans and the convertible offering for the first time since the convert issuance.

Based on our current forecast in calculating diluted EPS, US GAAP requires to us assume our notes were converted at the beginning of the quarter which means 13 million more shares outstanding during the quarter.

The calculation will also exclude after tax interest expense on the convert.

This brings our weighted-average diluted shares outstanding to approximately 92 million in Q4 for an accounting dilution impact from the convert of approximately $0.03.

As our full fiscal year 2009 guidance is expected to be a loss, the shares underlying the convert are anti dilutive so diluted EPS will equal basic for the full year.

Our key releases in Q4 are Rockstar Games and Timbaland Presents Beaterator, Borderlands, Grand Theft Auto Episodes from Liberty City, The Ballad of Gay Tony, Grand Theft Auto Chinatown Wars, NBA's 2K10, and NHL 2K10.

Our large Q4 release schedule should result in a revenue mix of about 80% from publishing and 20% from distribution and we expect gross profit margins to increase into the low 30s in that quarter.

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

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 few million dollars of tax expense in Q4, primarily reflecting earnings in our international territories.

I'll conclude by saying that we continue to reman highly focused on pursuing revenue opportunities but leverage our strong catalog of titles as well as identifying and implementing further areas of cost saving.

We're opening the mix of our 2010 budgeting process which includes firming up our release schedule.

We expect to have more to say about 2010 on our year end call in December.

Now I will turn the call back to Strauss.

Thanks, Lainie, thanks, Ben, and we will now take your questions.

Operator?

Thank you.

(Operator Instructions) Our first question comes from the line of Heath Terry with FBR Capital Markets.

Please go ahead.

(inaudible)

Sorry, Heath, we didn't actually hear this question on this end.

Would you mind repeating it.

I was saying, I was hoping you could give us an idea what you've seen from your retail partners in recent weeks following price cuts on hardware?

We haven't seen, we don't have anything to report today on what we've seen from retail.

Our outlook hasn't changed with respect to retail.

We think they are still being tentative and cautious.

I think the effect of the price cut is really too early to the tell.

I know we're off cycle in terms of our competitors.

But we really don't have a lot of data to share in terms of what retailers are seeing from the price cuts.

It's really too early.

Thanks .

Our next question come from the line of Daniel Ernst of Hudson Square Research, please go ahead.

Yes, good afternoon, thanks for taking the call.

Two questions if I might.

First, since earlier this year announcing that the push out of a couple of big titles would maybe give you a little more breathing room in development, with that time have you done any additional restructuring within the organization to yield better (inaudible)?

Or do you feel like the average (inaudible) in the first year or so in office have gotten the team work where you want it to be in terms of scale and structure?

And then second question, with the increase in games available on things like the iPhone and now DS Pico, and DSIWare and of course Xbox Y, two questions on that.

One is where do you think the size of that direct to consumer digital distribution could go for you over the next one to five years?

And then, two, is there any comments you can give us on the margin profile of that type of game relative to any Xbox sale?

Thanks.

Thanks, Daniel.

It's Ben here.

With respect to the product slippage, when we initially slipped the title we indicated we were taking it seriously enough and that something, in our view, didn't quite work the way it was supposed to work in terms of our green light process and R&D process.

And given the technical complexities of our product development it's not entirely surprising but nonetheless we took it very seriously and we continue to take it seriously.

We don't have today, I don't have anything to announce today in terms of how our processes will change.

We are evaluating this currently.

We've looked for outside help in terms of ways to improve our performance and improve our process.

And we think we are making some progress but this is still a work in progress and we're still fixing our processes to the extent they were broken in the first place.

Somewhere between process and the complexity of our games, some of these delays are expected and some of them should not be expected and we are still in the process of figuring out what's what.

In terms of the iPhone, Strauss, you want to handle that?

Yes, I think, Dan, you asked about the iPhone specifically in digital opportunities more generally speaking.

As you know, a big part of our strategy, a third of our strategy is the notion of innovation and we've outlined two years ago and continue to hammer home the notion that ongoing innovation is a big part of what we want to do around here.

Mobile platforms in general, the iPhone and iTouch more specifically, are a key part of that.

Six out of ten human beings on the earth have mobile devices and they do use them to play interactive entertainment and to enjoy it.

It's been somewhat hard to find -- for the industry, not for us -- to find the right business model to approach that.

We are really proud of our intellectual property, 16 franchises that have sold more than 1 million units, all of which are owned by our company.

We think we have the best collection of owned intellectual property in the industry.

So bringing that to the consumers who don't have consoles and maybe don't have PCs but do have mobile devices is pretty important.

Just yesterday we made an announcement about Chinatown Wars being available on iPhone and iTouch.

Beaterator obviously will be available on Apple platforms.

And we're going to continue to look to that as an opportunity.

It is early days.

The price points vary from consoles and handheld dedicated devices.

And it isn't clear what the consumer uptake will be but I think all of us are proud and excited by, first of all, we think the quality is just phenomenal.

Obviously we think that but that is our strategy, whatever platform we are producing for the quality should be A-plus and the titles just are phenomenal.

We are really proud of that.

And we think consumers will see it the same way.

In terms of its economic impact, too early to say.

More broadly on digital, we were a pioneer in downloadable content with the two episodes for Grand Theft Auto IV.

At the same time, retail remains our primary channel and so we are making those episodes available without having to buy the original title, on a disk this fall for consumers, and we are really excited about that.

We think it's a terrific opportunity for consumers.

So it was the best of both worlds.

We were able lead the way from an innovation point of view by seeing how downloadable content would do.

They were critically highly acclaimed, creatively highly acclaimed.

I will tell you the team at Rockstar was utterly engaged creatively with their creation.

And that's a big part of what we do around here is to make sure that our talented people here are working on what they are passionate about, not to the detriment of our economics but in concert with our economics.

But obviously it's a win win if we can work on things that people are passionate about and also create an opportunity for economics for the Company and the shareholders and at the same time pursue our strategy of innovation.

So I think that's a perfect example of trying something digitally, making it available in our biggest channel, which is retail, in a way that benefits everyone and primarily benefits consumers.

There also are a lot of other digital opportunities on the horizon including the On Live system and other competitive systems.

Too early to say how they will develop but obviously anything like that is a good thing for us.

Finally your question on margin for digital, the business will be different.

It doesn't encompass hard goods.

And it is by definition most likely a more open system than the traditional console business and there is an opportunity for us to drive a higher margin from doing that.

But now we are speculating about what will succeed, what content will work, which systems will work, and what the economic model will be.

So I think I will leave it at that.

Thanks for the color.

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

Please go ahead.

Thanks for taking my questions.

Lainie, I think you said you are working for through your fiscal 2010 budget process now, but some of the key drives for your fiscal 2010 were supposed to come out in fiscal 2009, that being BioShock 2, Max Payne and Red Dead.

Or Mafia, not May Payne, I think that was a fiscal 2010 event.

Do you expect any adjustment to your original sales assumptions from those games now coming out in fiscal 2010 than what you had in fiscal 2009?

As we're building our fiscal 2010 budget we are looking at it in a fresh way in terms of what's going on in the market right now, what the competitive landscape looks like, and the timing in which these games are going to be released.

Okay.

You mentioned timing, you said post January now for the Big Four.

I think before you said first half of calendar year 2010.

Is that time window still consistent or is it open now?

That timing is consistent.

We said the first half of calendar year 2010.

Then finally, for the games that were delayed, I know this may be sensitive, but can you give any updates on the development of those games?

Have the new milestones that have been set, have they been met?

Strauss, you talk a lot about quality.

Do you have any specific targets or range for quality on these sets of games?

Our quality standards haven't changed.

Most of the games we expect to be top rated games.

Some of the genres, some of the sport genres, don't have to be 90, and they're hard to get 90 in sports genres, but nonetheless NBA, for example, we expect to be extremely high rated and already is the highest rated game.

So our standards for quality haven't changed.

In terms of updates and milestones of the games that have been released, so far they are meeting their milestones.

We do follow up on the games.

We are checking up on the games.

We are meeting the milestones so far.

Sitting here today, we don't expect any changes to our release schedule.

Thanks guys.

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

Please go ahead.

Good afternoon.

A couple questions for you.

First of all, can you just talk a little bit more about the retailer buying patterns, what you are seeing for of an initial order at this stage relative to a year ago, and relative to earlier this year?

And then as a followup on the iPhone, Strauss, can you comment a little bit about what you expect as far as the revenue per game is concerned?

And what, if any, cannibalization we might see on the handhelds from moving to the iPhone and the iPod Touch.

And then lastly if you can just give us whatever color you can on the FY 2010 releases in terms of which games are coming in the first half of the year or what you have at this point that we can look at and focus on for that time period?

Thanks, Ed.

In terms of your first question, retailer buying patterns, the most I can say is that they are being, they are still being tentative and cautious.

Last time we spoke, the Christmas season was probably a little more crowded, BioShock was still in there, Splinter Cell was still in there.

It's becoming a little less crowded so I think retailers are a little happier with that.

At the same time, they have to move some of their earnings out from this year into next year, but next year is looking a little less seasonal than this year has been looking.

I'll also say that retailers tend to be looking at preorders more closely than they have in the past, and we are seeing some of that emphasis on preorders.

But that's really just symbolic of the caution that they're approaching the market with.

In terms of iPhone revenue per game, I think it's really hard.

We've launched one game on iPhone so far.

It's rare that you have both a winner and a learning experience at the same time but we have it with Civilization Revolution.

It was the number one game when we launched.

On the one hand, we were very pleased with the performance, on the other hand we are learning a lot through Civilization Revolution in terms of price point, in terms of take up rate and what's driving sales.

So it's really early to tell.

Everybody knows the apps stores tend to be crowded, and going more crowded not less crowded.

And we think that what drives consumers in that kind of a market is brands and franchises, and those are the guideposts that help consumers find what's quality and what's worth buying.

That's one of the primary reasons that Civilization Revolution did so well, apart from the quality of the game.

In terms of titles for 2010, we have nothing new to report in terms of update on timing.

I think what we said is the four major titles that we announced so far in the first half of calendar 2010 but not before January 31, 2010.

And that narrows it down to four months.

Just a couple more points on cannibalization, sorry five months.

A couple more points on the cannibalization issue.

We are not porting.

These are standalone titles for different platforms and people use their iPhone and their iTouch in different ways than they use their PSP and their DS, and people use their PC even in different ways than they use their consoles.

Because we are so focused on quality here, these are not port.

They are standalone titles and they're much more like line extensions, leveraging the intellectual property and leveraging the franchise than they are a port.

So I think cannibalization for a company like ours, with labels like ours, who are focused on making sure that every release that we put out is on a standalone basis is really high quality, really compelling, means that we can tailor our titles to the particular platform, and that's certainly what we are trying to do on iPhone.

Could that change over time if the platforms become more similar?

Sure, but people have been projecting that for the PC for an awful long time and it really hasn't happened yet.

So I don't really expect it will happen with a handheld device either.

I'm also pretty convinced that you use an iPhone for entertainment in a way that's different than the way you use a PSP or a DS in terms of how much time you devote and the engagement with the experience, the kind of engagement you actually want.

And I suspect the iPhone and iTouch calls for more bite size experience than the PSP or the DS.

All that says that I think we are not as worried about cannibalization.

And frankly, even if we were, we would rather have a larger market share for our intellectual property across all possible platforms than we would to try to parse what a consumer might possibly want in the highest value platform.

Within the very narrow rubric of doing AAA titles for our own intellectual property, within that very narrow rubric, we try to be very, very broad about what we can offer our consumers, because we aim to delight them with the best products in the business.

I would add to that, one of the things that's exciting potentially about the iPhone is the expansion of the market.

Nintendo did a great job expanding the demographic of the market.

The core gaming audience is still pretty much just the core gaming audience, but what makes the iPhone and iPod Touch particularly exciting is their broad reach to a broad demographic, not just in the way they react with interactive entertainment but also just their access to interactive entertainment.

So the promise of a much greater audience benefits us as it does all publishers.

As a quick follow up to that, how do you see marketing to both things?

How do you see marketing to that iPhone, iPod Touch consumer, and how different is that versus traditional marketing?

And then, secondly, how do you improve the marketing to drive the pre-orders to therefore leads to retailers increasing the initial orders of your key titles?

On your second question first, I think it would be a mistake to think of iPod Touch and iPhone as strictly promotions for retail sale.

They can be used that way but they can also be profitable games in their own right.

And so I'd be careful about thinking of this as just promotion.

In terms of the marketing to iPhone and iPod Touch, I'd say two things.

One is, as I said, we are still learning.

We experiment, for example, with price points, on iPod Touch with $5, $10.

We are $5 again and we understand a little bit more about consumer behavior and what drives consumer behavior.

The other important thing to mention is we are spending a lot of time with our marketing group making sure that we have a world class marketing group that understands consumer behavior, that can launch a new product, take the learning, learn from that, propagate that throughout the Company so that the next time we launch on the app store we have better knowledge and we're better at marketing.

I think it's really too early to call a business model for the iPod Touch and iPhone but it's not too early to be learning and it's not too early to bring our brands to the market.

Okay.

Thank you.

Our next question comes from the line of Arvind Bhatia with Sterne Agee.

Please go ahead.

Thank you, a couple questions.

One, you talked about Europe being also weak.

You mentioned France and Germany however were doing better.

I wonder if you can talk about UK in particular, they are not doing too well from your perspective, are they down just as much as the US in the recent month or so?

That's my first question, then I have a follow up.

The UK, I would say maybe not -- the thing about France and Germany is this, they are showing what's known as early green shoots now.

I don't think we've seen that out of the UK per se.

In terms of our own catalog and our own products, certainly for the third quarter seems to be doing okay, seems to be holding up.

Our sales team there is second to none.

We are really proud of their efforts and their relationships with retail partners.

And so far, knock on wood, things have held up pretty nicely for us there.

Have you seen any piracy issues in the DS?

I know that's not a big focus next quarter for you but have you seen any issues with DS piracy?

Without question there are issues of DS piracy.

Without getting into great detail and numbers, it's an issue.

One last question, I don't know if you can really answer this but I just want to understand your strategy on the announcement of your next GTA franchise.

Whenever that's going to be, how long prior to that do you think you'll be able to communicate that?

And I say that because in the past it's varied where you've announced it as early as six months to a year before the launch.

I just wonder if you can give us some color without giving us exact timing, obviously, as to the strategy of your thinking is.

So we are not going to announce it.

We are not going to announce when we are going to announce it.

And we are not going to announce the strategy about announcing it or about when we are going to announce it either, or about the announcement strategy surrounding the announcement of the strategy.

Any other questions?

Last question is on the cash flow money.

Lainie, can you talk about cash flow for this year that you are modeling based on the EPS guidance?

We don't share our cash flow projections but I can tell you that in Q4 we will be using cash as our lease schedule is heavily weighted towards the back end of the quarter and we will be collecting the cash on those sales in Q1 of next year.

Great.

Thank you.

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

Please go ahead.

A few questions hopefully pretty quick.

What does the launch of Project Natal and Tony's Motion Sensor mean for Take-Two next year and are you already working on titles that are going to utilize those capabilities?

And then on the new GTA download, not the package goods that's in the stores but the actual download itself, what are the lessons learned from the original locking bands in terms of marketing and sales for that?

And then also if you could talk about Sports, wondering how preorders are looking for NBA versus last year.

And finally one more, online package goods retailers like Amazon, can you talk about the trend lines there in terms of how important they are to the business this year versus last year and where you think that goes?

Thanks.

Strauss, why don't you take the download first.

I think the lesson learned from our point of view is that we are grateful that we took it on.

We are passionate about trying it.

It's a good piece of business for it.

It was very highly rated and we now have actually another retail opportunity here.

Also another opportunity to expand the audience of consumers who will be able to consume Grand Theft Auto for another iteration on a standalone basis, either online if they have access to online or in a packaged good.

I think the lesson learned, probably the biggest lesson learned is that it is possible to come out with something very high quality that is a subset of the original title and a line extension.

And I think the second lesson learned is that one of the biggest shifts in the interactive entertainment business is that, now like basically every other entertainment business, there are multiple windows available for an individual product, and that will probably change everyone's view of product creation, line extension, and line expansion.

And the lessons learned have been good ones.

If I may, Strauss, I think one of the lessons that not just in this download but from some of the other download experiences it's clear that retail is the channel for the foreseeable future.

Nonetheless, there is a download component to a lot of our games and there will continue to be a download component.

The games live online and they live at retail.

They live at both.

And whether that's download first, retail second, or retail first, download second, or some combination of the two, that's an area that we are going to experiment with because we are innovating in that area and it's likely to change from title to title.

But everything is going to have a download component, and needs to have a download component to it, and this is one of the key lessons and we will see how GTA in the retail skew performs.

We are actually pretty optimistic about it and we think it's a terrific value.

For $40, two great GTA games, new content available in retail, it's an unbelievable value.

So the downloads help to seed that market and we think will be critically important.

In terms of you other question, Natal Motion Sensor, yes we have that, yes, we are working on them, obviously can't comment on games that we haven't announced.

But those dub kits are embedded in all of our studios, or just about all of our studios, and everybody is working with them to try to figure out new ways in which we can innovate and create the kind of concepts that this company is famous for.

So, yes, we are working on it.

Sports, NBA pre-orders, we don't talk about pre-orders.

My expectation is, my hope is that NBA will continue to take market share.

We think NBA 2K10 will be a game that we are going to be very, very proud of.

We are thrilled by Kobi Bryant not only on the cover but also as a spokesperson.

He's a terrific spokesperson, not only a great athlete but a great articulator of what the game can be.

So we're pleased about that.

The last question in terms of online packaged goods and trending this year versus last year.

It's a great question.

I don't have the data in front of me but I will tell you that we are seeing, at least in the US, a greater concentration at retail so that the top five retailers are taking more market share.

I don't know that that's a trend, I don't know the significant of all that but we are seeing some data that shows that.

Again, too early to call a trend but it would not surprise me to see further concentration at retail.

Great, thanks for answering all the questions.

Your next question is from the line of Mike Hickey.

Please go ahead.

Thanks, guys, for taking a quick follow up.

Can you refresh us on the development of LA Noir?

It's in development, nothing to announce today.

When we have more to announce we will announce it.

We are continuing to develop it.

We think it's pretty exciting and innovative and when we have more to share we'll share it.

Is that still being handled by your Rockstar San Diego studio?

It's handled by Rockstar.

Okay.

Thank you.

If there are no more questions, thank you all for joining us today.

We really appreciate it and we will be back to you in the next quarter.

Thanks so much.

Thank you.

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

You may disconnect your lines at this time.

Thank you for your participation.