Take-Two Interactive Software Inc (TTWO) 2010 Q1 法說會逐字稿

Greetings welcome to the Take-Two Interactive Software Q1 2010 results.

(Operator Instructions).

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

Thank you Ms.

Buckwalter, you may begin.

Thank you.

Welcome, and thank you for joining us for our first quarter conference call.

Today's call will be led by Strauss Zelnick, Chairman or 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 would first like to quickly review our Safe Harbor statement by reminding everyone that the statements made during this call, that are not historical fact are considered forward-looking statements under Federal Securities laws.

These forward-looking statements are based on beliefs of 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 the 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 fiscal year ended October 31, 2009.

Documents maybe obtained from our website at www.taketwogames.com.

Now I will turn the call over to Strauss.

Thanks, Cindy.

Good afternoon, everyone, and thank you for joining us.

Today we have largely a good news call.

We will cover our financial results for the first quarter, highlight your team's recent accomplishments, and discuss our strong line-up and our increased guidance for fiscal 2010.

Our first quarter results were better than the guidance we provided in December.

Net revenue was $163 million, 9% higher than 2009's first quarter net revenue of $149 million.

And our non-GAAP net loss was $24.4 million or $0.31 a share, a significant improvement over non-GAAP net loss of $42.8 million or $0.56 a share for the first quarter of 2009.

These results reflect a strong performance of several of recent new releases including NBA 2K10 and Borderlands, our Grand Theft Auto, Carnival games, and Civilization franchises were also key contributors.

While traditional retailers will continue to be the primary channel for our business and industry for the foreseeable future, we have begun to capitalize in new platforms, and digital distribution channels to expands the market for our high quality entertainment expenses.

Strong response to our industry leading downloadable content, and digital sales of catalog titles were also factors in our better than expected first quarter results.

Our catalog PC titles have been generating meaningful digital sales, which is significant because the titles would be challenged to find shelf space at traditional retailers.

Our digital business has delivered solid growth year-over-year, and represented 12% of our revenue in the first quarter.

Increasingly, we will enhance our core business with downloadable content, and selectively engage in strategic opportunities in emerging markets and for new platforms.

And we also made positive strides to improve the efficiency of our business further, and align our corporate cost structure closely with current goals, and the associated cost reductions benefited our results.

Ben and Lainie will provide details on those initiatives.

Today, we are increasing guidance for the fiscal year while maintaining prudent approach, since we believe 2010 will continue to be challenging for both our industry and our Company.

US retailers haven't changed conservative outlook, and they are still limiting initial launch quantities, and consumers remaining equally careful with their spending.

That said, premium entertainment experiences and proven brands still drive strong demand.

Our strategy is to deliver efficiently a select number of the most creative and innovative titles in the industry that capture mind share and market share alike.

Our planned 2010 line-up is our most diverse ever, and includes both new intellectual property and sequels to a number of our proven and highly successful franchises, BioShock 2, LA Noire, Mafia II, Max Payne 3, Red Dead Redemption and Sid Meier's Civilization V.

In addition to growing the business, we remain focused on improving execution and efficiency.

Our management team is committed to operating our business profitably in the future, and we believe that we have the ability to deliver on that goal.

Now we will turn the call over to Ben.

Thank you, Strauss.

I would like to discuss product high lights rescheduled for the balance of the year, and some of our operational and market expansion initiatives.

On February 9th, we delivered the eagerly anticipated world-wide launch of BioShock 2.

The game is both a critical and commercial hit.

It's been praised for it's high stunning art style, compelling story line, and intense multiplayer action.

Playstation, the official magazine, called it one of the best games you will ever play, and awarded it a perfect review score, a five out of five.

BioShock 2 has shipped 3 million units worldwide.

We're very proud of reaching this milestone after less than one month in the market.

BioShock franchise has now surpassed 7 million units.

Last week we announced substantial plans to support BioShock 2, with several upcoming releases of downloadable talent which will immerse gamers in the world of rapture.

We would like to congratulate the 2K-2K on coordinating this global development effort, including talented teams in Marin, Australia, China, as well as our partner Digital Extremes.

Borderland proven to be a solid addition to our portfolio, and continues to build upon its success in the market.

Since the games launch in October, we've released three downloadable add-ons that enhance the game play experience, and consumer loyalty through new missions, levels, and weapons.

Our latest add-on, the Secret Armory of General Knoxx has been the highest scoring and best received in the series, which illustrates the on-going strength of the new franchise.

We will support the title with more add-on content.

Our approach to digital content for Borderlands gives us road map for other titles going forward, and builds on a very successful steps in this area.

2K Sports remains dominant in basketball category, and successfully increased it's market share with NBA 2K10.

The the game has now sold more than 2 million units worldwide, which underscores unparalleled realistic game play which captures all of the nuances and excitement of the NBA.

We continue to benefit from our strong catalog business, our internally owned and developed Carnival games franchise reached another milestone, achieving over 6 million units sold worldwide.

Reaching this milestone illustrates why Carnival games is one of the industry's most successful family entertainment franchises that continues to sell well, even two and a half years after it's release.

Our catalog business has also been strengthened by digital delivery of our products.

Rockstar has launched all of it's market leading PSP catalog of titles on PSM, and we have continuing sales of the Grand Theft Auto downloadable episodes.

Building upon our select offerings for the iPhone and iTouch, Rockstar Games released it's critically acclaimed hand-held title Grand Theft Auto:Chinatown Wars.

The title quickly became the top selling application on the app store, and was Rockstar's top selling app for the iPhone, ahead of Beaterator.

We will continue to bring our intellectual property to this, and emerging platforms when it makes sense to do so.

I would like to take you through the key releases for the balance of the year.

Yesterday, 2K Sports launched Major League Baseball 2K10, latest iteration from our -- for our baseball franchise.

Pleased with the initial response from the game techs, who highlighted the significant improvements in the title this year.

We hope that consumers enjoy two and test their skills at pitching a perfect game in our $1 million contest.

Later this month, Rockstar will make it's critically acclaimed episodes from Liberty City available for both PS Playstation 3 and Games for Windows Live.

Both popular episodes, The Lost and Damned and Ballad of Gay Tony will be available individually by digital download for each platform.

Consumer whose played Grand Theft Auto 4 on PS3 and PC have been eagerly awaiting Grand Theft Auto episodes for Liberty City, and we're pleased to award the patience with two fantastic episodes that exemplify the creative strength of Rockstar games.

Rockstar is also gearing up for the eagerly anticipated launch of Red Dead Redemption.

We shifted the launch by several weeks into our third fiscal quarter.

The North American street date is now May 18th, and international date is May 21st.

We believe this is the optimal time frame to release what is already being hailed as the true next generation of open world games.

The game is being supported by a blockbuster marketing campaign that fully leverages Rockstar heritage and iconic style across high impact television online and out of door creative.

Retail is supporting the launch strongly with custom pre-order programs, co-marketing campaigns, and massive channel marketing initiatives, running across all key retailers throughout the launch period.

Our strategy to date, has been to build rather than acquire companies in the social network game sector.

And this year we are launch open beta of pure web-based game Sid Meier's Civilization network.

We're excited to enter this category of gaming, and are pleased to have Sid Meier working on the offering.

In addition, Sid and his team, Firaxis, are developing Civilization V, the next installment of our multi-million unit PC selling PC franchise.

Planned for release in our fourth quarter, Civilization V promises to expand the classic turnbase strategy genre with a new engine, built from the ground up for this flagship edition of the franchise.

The game will feature entirely new combat system deeper diplomatic interactions.

and in-game community hub, amending features that will give the players the opportunity to build and defend their empire on their quest to become the world's greatest ruler.

We plan to introduce LA Noire, a groundbreaking new title from Rockstar during our fourth quarter.

Already featured on the quarter of February issue of Game Informer magazine, LA Noire is an unique blend of action and crime solving that uses a massive game world, a street for street recreation of 1947 Los Angeles.

We will also use a revolutionary head animation system to create a brand new style of game play.

As a rookie detective in the seedy underbelly of post war Los Angeles, players will interrogate suspects, search for clues track down dangerous criminals, and piece together the facts to reveal the truth in a town full with lies.

Stunning attention to detail, the game captures every element of the period.

We moved Mafia II into our fourth fiscal quarter to provide additional development time for the title we believe will help to ensure our high standards for quality and performance.

Rockstar's Max Payne 3 and LA Noire is scheduled for release in our fourth quarter.

We are working hard to deliver all of titles on schedule.

That said our fiscal 2010 guidance reflects the potential movement of one of these titles into fiscal 2011.

And we'll also launch the next installment of 2K Sports' number one NBA 2K franchise during our fourth quarter.

We will provide additional information on the timing in these releases in the coming months.

I'd like to turn to it to our operations.

Last week we completed the sales of our Jack of All Games distribution business.

This transaction is consistent with our stated attention to focus resources on our core business, delivering the most innovative, creative intellectual properties in the interactive entertainment industry.

The sale also supported our goal of achieving greater efficiencies throughout our global organization, and Lainie will provide additional details.

As part of our on-going commit to improve the efficiency of our business, we initiated a targeted restructuring focus on our corporate departments in order to align our cost structure more closely with current goals.

This initiative will result in savings of approximately $8 million during fiscal year 2010, and annualized savings of approximately $15 million.

We've also taken steps to grow our presence in international markets.

We've established a direct publishing presence in Japan, where our Grand Theft Auto franchise has long been the number one selling western international property.

By publishing directly, we expect to increase our margins without taking on undue risk or overhead.

We intend to offer a vary of titles from our portfolio, and will continue to work with our valued partners in Japan for sales and distribution.

The first title to be published under this new structure will be Rockstar's Grand Theft Auto: Episodes From Liberty City.

Our business in Latin America showing signs of increased strength, and we've seen our revenue grow in both Mexico and Brazil over the prior year.

We are currently working with multiple distribution partners in the region and are very pleased with the results to date with BioShock 2.

We are working with partner, Tencent to develop NBA 2K online for China and other key Asian markets, and we are working with distributors in Russia to increase our presence there.

Take-Two continues to be a home for outstanding talents, and our creative teams are focused on a more diverse portfolio of AAA products, number of emerging platforms, more geographic regions than ever before.

We have a proven track record of creating high quality titles, and a sound financial position that provides us with the strength and flexibility to build long-term value for our shareholders.

While we are working to leverage strengths, we remain diligent in addressing areas of our business where we can improve upon our execution and efficiency.

These include focusing on predictability in our development process, which will enable us to achieve consistency without sacrificing standards for creativity in our sports business, and working to minimize the negative impact of our MLB contract, evaluating our cost structure for additional savings, expanding our portfolio of multi-million unit selling intellectual properties, while remaining focused on select AAA titles.

And pursuing growth areas by selectively engaging in strategic opportunities in emerging markets and new platforms.

Now I would like the turn the call over to Lainie.

Thanks Ben, good afternoon everyone.

I will review our first quarter results, and discuss our outlook for Q2 and fiscal year 2010.

Please note that due to the recent sale of our distribution business, all of numbers I will be providing today, both historical and forward-looking, exclude Jack of All Games results from our continuing operations.

The deal closed on February 26th, and was valued at approximately $44 million, including $37.5 million in cash, and up to an additional $6.75 million in deferred payments.

In addition, all of the numbers that I will discuss are non-GAAP unless otherwise noted, and all Jack of All Games numbers are excluded from our non-GAAP results.

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

Net revenue was $163.2 million in the first quarter, a 9% increase from $149.4 million a year ago.

Non-GAAP net loss is $24.4 million, or $0.31 per share, compared to non-GAAP net loss of $42.8 million last year or $0.56 per share.

There were several factors that led to our results exceeding guidance.

On the revenue side, a variety of our titles performed better than expected including NBA 2K10, Carnival Games, Grand Theft Auto 4, and Borderlands.

Our digital business was also strong.

The Borderlands downloadable content was very well received, and we also realized strong sales in a variety of our digitally delivered catalog titles.

Our digital revenue was approximately 12% of revenue, compared to less than 3% in Q1 of last year.

Our package goods catalog business was also very strong, representing approximately 40% of our revenue in the quarter.

Gross margins were slightly lower than expected, due to our product mix, which carried higher internal and external royalty costs.

We also realized increased capitalized software expense from the accelerated amortization of certain titles, and the cancellation of a title.

On the expense side we achieved some initial savings during the quarter from our cross cutting initiatives, and lower personnel expenses, along with reduced professional fees.

Sales and marketing expenses were less than expected due to the timing of our marketing spend and new hires, along with more efficient allocation of marketing dollars.

R&D expenses declined more significantly than anticipated, as a result of the timing of new hires and higher capitalization rates.

The quarter's top titles were Borderland, NBA 2K10, Grand Theft Auto 4, Carnival Games, and Grand Theft Auto: Episodes From Liberty City.

Our GAAP result for the first quarter were net loss of $33.8 million from continuing operations or $0.43 per share, compared with a net loss from continuing operations of $53.8 million or $0.71 per share in the first quarter of 2009.

Our GAAP results in Q1 includes $6.4 million in stock-based compensation expense, $1.7 million in non-cash interest expense on our convertible notes, $700,000 of professional fees and expenses related to unusual legal matters, and $600,000 of non-cash tax expense.

Looking at our Q1 results compared to the first quarter of last year, our non-GAAP gross margin for the quarter was approximately 40%, up from 32% primarily due to our product mix and our lower internal royalty expense.

Non-GAAP operating expenses in the first quarter were approximately $84 million, a 10% reduction from the first quarter of 2009, as a result of the following factors.

Other expenses decreased by nearly $5 million, or 15%, primarily to lower professional fees, personnel expenses and bad debt expense.

R&D expenses decreased by $5.8 million due to timing of new hires and increased capitalization rates.

Last year's number also include the write off of a project and development.

Sales and marketing expenses increased by about $2 million, majority related to marketing for Borderland and BioShock 2.

Interest and other expense increased by about $5.5 million, reflects $900,000 dollar foreign exchange loss in the quarter verse us a gain of $3.9 million last year.

We also had slightly higher cash interest expense as compared too last year, as the impact of the higher debt level under our convert, more than offset our more advantageous coupon rate.

Moving to on our balance sheet at the end of Q1, we had $106 million in cash.

This number does not include $37.5 million in cash, from the sale of Jack of All Games that we received on February 26th.

Our accounts receivable reserve was about $34 million at the end of the quarter, which represented approximately 43% of gross receivables.

The reserve percentage is in line with historical levels for this time of year, where we typically have increased levels of price protection following the release of major titles for the holiday season.

The reserve percentage was also affected by the relatively low accounts receivable balance at tend of Q1.

Inventory at the end of the quarter was approximately $51 million, up from this time last year, primarily due to the inventory build for BioShock 2 which shipped in the first week of Q2.

Software development cost and licenses, were up year-over-year, reflecting the significant development efforts around the AAA fiscal 2010 releases.

I would like to mention some items of note on our balance sheet.

There are line items for both assets and liabilities held for sale, which relate to the sale of our Jack of All Games business.

The transaction closed on February 26th, after the end of our first quarter.

Beginning in the Q1, we adopted a new accounting standard that that requires convertible debt to be bifurcated to debt and equity components.

Our $138 million of convertible notes are now reflected on our balance sheet as $99 million in long-term debt, and balance booked into equity for the option value of the convertible feature.

Before I review our outlook, I would like to provide some additional color on cost cutting initiatives that Ben mentioned earlier.

We implemented a targeted restructuring of our corporate departments in order to align resources more closely with current goals ,including some changes associated with the sale of our Jack of All Games business.

This resulted in the 15% reduction in corporate head count.

Other cost savings initiatives include reduction in professional fees and operating expense, as well as reduction in North American distribution fees.

These actions expected to result in approximately $8 million in savings in fiscal 2010, and $15 million on an annualized basis.

Approximately 60% of the fiscal 2010 cost reductions will be realized in our G&A expenses, and about 40% in sales and marketing.

These savings are reflected in the updated guidance we have provided today for fiscal 2010.

We continue to focus on driving costs out of our business, and improving our margins.

One area of margin improvement factored in to our guidance this year is our new business arrangement in Japan.

We will operate as a independent publisher starting this summer with release of Rockstar's Grand Theft Auto: Episodes From Liberty City.

Publishing our own games in Japan, rather than using the third partner will result in higher margins for our title.

Now to our outlook which is provided on a non-GAAP basis, we are increasing our fiscal 2010 guidance to reflect our cost savings initiatives and better than expected performance in Q.1 which are partially offset by the changes in our release schedule that we detailed today.

Our 2010 guidance assumes continued challenging retail environment, and does not factor in any additional cost savings opportunities.

Maintaining our release schedule is critical to achieving fiscal year numbers.

Our results maybe affected by variability and foreign exchange rates.

For the full-year, we expect non-GAAP loss per share in the range of $0.40 to $0.60 on $725 million to $925 million in revenue.

This excludes stock-based compensation expense of $0.40 per share, expenses related to our corporate restructuring and unusual legal matters of $0.02 per share, non-cash tax expense of $0.04 per share, and non-cash interest expense on our convertible notes of $0.09 per share.

Due to the new accounting standards for our convertible notes that I mentioned earlier, we have begun to record non-cash interest expense in addition, to interest expense recorded for coupon payments.

The non-cash portion of the interest expense is reported on a non-GAAP basis.

We expect gross margin for fiscal 2010 to be in the high 30s.

This is up from fiscal 2009, primarily due to the number of internally owned and developed titles we have launching in 2010, as well as Rockstar royalty plan, which is a profit sharing arrangement.

We expect our split between North America and international revenue to be about 65% to 35%.

Excluding our sports business, the North America and international split expected to be 60% to 40%.

We expect revenue break down from labels to be roughly 30% from Rockstar, and 70% from 2K.

The 70% from 2K breaks down as follows, 45% from 2K Games.

20% from 2K Sports, 5% from 2k Play.

Now to our operating expenses.

Our recent cost savings initiatives led to nearly a 6% reduction in fixed G&A cost compared to 2009.

This is being partially offset by higher incentive compensation accruals this year, where net expected decrease in total G&A expenses of about 3%, year-over-year.

Sales and marketing expense will increase significantly, to support strong line-up of key titles planned for 2010.

However we expect sales and marketing to remain about flat as a percentage of sales.

Both R&D and depreciation and amortization will remain about flat year-over-year.

Our fiscal 2010 guidance reflects tax expense of about $6 million, primarily attributal to our international operation, and an estimated share count of approximately 79 million.

Our full-year loss includes an estimated non-GAAP loss of $30 million to $35 million, or $0.38 to $0.44 cents per share related to our Major League Baseball business.

We are also providing initial guidance today for the second quarter.

We expect non-cash (inaudible) in the range of $0.20 to $0.30 on $250 million to $300 million in revenue.

This excludes stock based compensation expense of $0.08 per share, non-cash interest expense related to our convertible notes of $0.02 per share, expenses related to our corporate restructuring and unusual legal matters of $0.01 per share, and non-cash tax expense of $0.01 per share.

We expect Q2 gross profit margins in the mid 40s.

We have several new releases in Q2, we already shipped BioShock 2 and Major League Baseball 2K10.

We will be releasing Grand Theft Auto: Episodes From Liberty City for PlayStation 3 and Games for Windows Live in late March.

The remainder of Q2 business is expected to come from continued sales of recent releases and catalog sales.

Overall operating expenses up significantly in Q2, as compared to Q2 of last year, primarily driven by increased sales and marketing expenses supporting our big title launches.

G&A will increase slightly as we had a credit for bad debt expense in Q2 of last year.

R&D is expected to be approximately 10% higher due to the continued investment in our studios.

Our Q2 guidance (inaudible) forecasted tax expense of about $300,000, primarily attributable to international operation, and an estimated diluted share count of approximately 93 million.

Looking to the balance of the year, Red Dead Redemption is the only key title planned for release in our third quarter.

We expect that to be a lighter revenue quarter, with relatively low gross margins due to the development cost for the title.

Based on our current release schedule, we expect Q3 to be the low point of the year, in terms of our gross margin and bottom line results.

Our key titles planned for Q4 are LA Noire, Mafia II, Max Payne 3 and Sid Meier's Civilization V.

However, in taking a prudent approach, fiscal 2010 guidance assumes one of these titles may be potentially moved in to fiscal 2011.

I will conclude by saying, that we remain highly focused on executing on our product release schedule, and continuing to identify and implement further areas of cost savings throughout the Company.

Now, I will turn the call back to Strauss.

Thanks, Lainie and Ben.

Our first quarter performance reflected many of Take-Two's fundamental strengths, our ability to build a select diversified portfolio of AAA titles, further leveraging our strong intellectual property by pathing into digital platforms, and continued strides in operating the business more efficiently.

We look forward to building on those strengths as we go forward.

We will now be happy to take your questions.

Operator?

Thank you.

(Operator Instructions).

Our first question comes from the line of Eric Handler with MKM Partners.

Please proceed with your question.

Thanks for taking my call.

A couple things I wanted to go over.

You had a big beat in the first quarter, and relative to consensus, numbers are going up in the second quarter.

But when I look at the second through the Q4 combined, with $0.20 beat in the first quarter, and the $0.10 positive result from cost cuttings, why aren't more of those dollars flowing through in your guidance for the bottom line?

Eric, it's Lainie.

When we took a look at the full-year, we still have a lot of things that are unknown towards the end of the year.

And as much as we have the cost savings, as well as better performance in Q1, we also have some titles that are moving in the release schedule a little bit.

So we took a prudent approach through the sales estimates continuing throughout this year, and this is where the whole year turned up.

So we feel great , that we were able to raise our guidance some, but it's certainly is early in the year.

And we are continuing to watch as we go through each

You also had the first quarter revenue number, which was a big beat, relative to what you were thinking back in December.

What change, what really kicked in, that really provided a lot of upside from what you were looking for originally?

Well when we start going in to Q1, the retail environment was really soft leading in to the holiday season, and we had a good Thanksgiving, but we had a lot of promotions on a lot of our products.

So we took a prudent approach to the rest of the holiday season.

And several of our catalog titles, and our NBA title performed better than we had expected.

We also did not have as much history on how the Borderland DLC would perform, so that really performed above our expectations as well.

And then as we started focusing on our costs, we were really -- especially during Q1, as we were identifying areas for improvement throughout the year, we were very tight on expenses.

And that was how we were able to achieve the first quarter.

Okay, thank you.

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

Please proceed with your question.

Great, thank you.

Just a couple of questions.

First, you talked a lot in the past about the impact that the used market had on the original version of BioShock.

Can you give us a sense, just here in the first few weeks, what you are seeing in terms of whether or not there has been a change to that kind of impact for BioShock 2, and if so, what you think is driving that?

And then, notice on the release schedule that the NHL title for this year is We Only, and the NBA title is, to be determined, in terms of the platforms that you got planned for.

Can you just give us insight in to the strategy for your sports business in the year ahead.?

Sure, Heath, it's Ben calling -- speaking.

On the impact of used games on our business, specifically BioShock, and Borderlands, in a way, you never know the used sales that you don't have.

So it's hard for us really to tell.

I will say that we've seen uptick in BioShock 1 catalog, which we do think was impacted by used games.

We have seen a big uptick in BioShock 1, as a result of BioShock 2.

As we announced today, total units for the entire franchise, 7 million units, 3 million for BioShock 2, that implies 4 million for BioShock 1, on the order of higher mathematics.

And so, we are pleased with it.

We think that the DLC is providing value to our consumers.

We think that consumers like it and they want it.

We continue to work with our retail partners to provide maximum value for our consumers.

It's hard to tell, we don't have great sense for sales loss, but we do think we got it dialed in pretty good right now.

In terms of NHL, we are taking the year off on our PS3 and Xbox 360.

We are doing that because we are so committed to competing and winning, and we think those platforms need a breather so we can go back, redesign, rethink, as opposed to continuing to reiterate.

And we think as a result of that, we will come back the following year we will come back a lot stronger.

We are continuing to develop the Wii, which we think is exciting, and we built a presence in Canada, specifically on the Wii title, with the help of and support of Nintendo, for which we are very grateful.

So that's the thinking, I don't think there is much more beyond that other than an intention to win and maximize the opportunity.

Great, thank you.

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

Please proceed with your question.

Thank you, and congratulations on a good quarter.

Couple of questions here, just big picture, second half of the year, wondering if you have any thoughts on console price cuts at this point?

And also on the motion controllers, you didn't highlight anything this fiscal year, but do you have anything for Christmas.

And lastly, the four titles, or five titles of the back, in the last quarter, saying one of them could potentially move out.

These titles can of course be different levels in terms of unit volume et cetera, so maybe help us understand which one is more likely to be on the cusp of Q4 and Q1 of next year?

Thanks, Arvind.

It's Strauss.

I'm going to take the last question first.

In terms of the fourth quarter, we are utterly committed to making AAA titles, and utterly committed to executing better and delivering those titles on time, our experience of last year was not lost on us.

The whole team, everyone, is utterly committed, and those things are hard to do at the same time.

We have ambitious release schedule, coming up at the end of the year.

We do believe in it, or we wouldn't have announced it.

At the same time, we are trying to make sure expectations in terms of guidance remain prudent.

So we've said, look, it's possible one title move from a financial point of view.

You are correct, obviously, our expectations could be different title to title, so we did the best that we could to estimate what the impact would be.

In terms of likelihood, sitting here today, it's not likely any of the titles will move, so that's why they are on a release schedule.

Again, we are trying to be judicious, as we look at our expectations.

As I said, this is largely a good news call.

But it would be better news if we were talking about profitability for the entire year, and not just profitability for the upcoming quarter, and beating our guidance.

And that remains our focus and ambition.

The good news is, there is reason to believe that we have a great deal of opportunity.

And that's what we are all trying to achieve.

And Ben is going to handle your other two questions.

Price cuts, we have nothing really to add, other than what is known in the industry, or not known the the industry.

Obviously, we welcome price cuts.

We think that's good news for all publishers, but we don't have information to provide to anybody on the call in respect to price cuts.

And with respect to controllers in the call, and the Sony controller, we are evaluating them as you can imagine, as indicated in the past.

We have no products to announce in the call for the Sony controller.

But we are obviously excited about that, we do think that it extends the console cycle.

We do think that provides an opportunity for our creative teams to innovate, because any time you have new hardware features, it allows the creative team to innovate.

So we are looking carefully, and obviously our partners share with us information, we can't always share with you.

But we are looking at it quite carefully, and are pretty excited about it.

Great, thank you, guys .

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

Please proceed with your question.

Thanks.

I was wondering, obviously, you had nice success with your Borderland downloadable content, if you might talk a bit about what you are planning for BioShock 2 and Red Dead Redemption, is it going to be as comprehensive as what we saw for Borderlands?

Thanks.

Thanks, Doug.

We don't have much to say other than obviously, the guys at 2K have had some terrific success with Borderlands.

We have learned some key lessons, which we are taking on board, and trying to fold in to all of our products.

Some of our products do better with downloadable content than others.

Obviously when we are ready to announce it, we will announce it.

We are not prepared with this call.

But we obviously been impressed by the interest on the part of consumers, and the margins and the impact it has on our bottom line.

So we are looking at it quite carefully.

Okay, thanks.

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

Please proceed with your question.

Hey, guys.

A few questions, one on the balance sheet, can you tell us where the software development cost are going to max out, when we can expect that to bin to decline.

On the digital sales, to follow up on that question, can you break it out a bit more in terms of understanding what made up the 12%, was it the catalog PC, was it primarily the DLC on Borderlands?

Anymore detail on that would be appreciated, and couple of game questions.

Any update on MBA 2K, what you are trying to do with Tencent?

What should we be thinking about for this, is there a time, how far along is it, and then finally is Agent still in development?

So Ben, I will take the NBA question, and I'll take the Agent question, and toss it over to Lainie for the others.

Yes, the short answer for Agent is, yes, it's still in development.

On the NBA online, it's also short answer, we have nothing new to add here, other than development proceeds, guys at Tencents are doing a great job.

I was in China, we got good feedback on the way the two teams are working together, which is often a real problem.

Because remember what we are doing is taking our game and their platform, and marrying the two together.

And you can imagine sometimes those are tough conversations to have among developers, but so far everybody is really excited about the game and the brand in China.

And I do believe that we've chosen the right partner with Tencent They are probably the best distribution we could get in the country, and they are very well capitalized, and I think we personally get along on a personal relationship, we have great thing going.

So I don't have any detail about NBA Online, other than things are proceeding and we are pleased with the progress.

Lainie, do you want to handle the other two?

For the cap software balances, we don't really share that specific projection.

But we do have a lot of titles that are in development right now, that are coming to launch in fiscal year 2010 and 2011, with larger cap software balances.

So we will start to see those start to drop off.

But we continue to develop high quality games going forward, so we will see those continue to grow, as we have more titles in the pipeline coming out for the future.

So for digital, cap for digital, we have really been strengthened by the digital delivery of our products, Rockstars launchings, their catalogs, and PSM.

We have the stuff on Steam.

We are not breaking that down specifically by title by title, but that plus our DLC, is really what's driving digital sales to a higher percentage than the last quarter.

Is mobile or iphone important at all?

It's small, but it's definitely part of the overall balance.

Thanks, and good luck.

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

Please proceed with your question.

Thanks for taking my questions.

First one is on Red Dead, can you explain why taking an extra two weeks is a better release window?

And can you quantify the impact on your Q2 earnings in moving the game into Q3?

Yes, we think it's a better release window, gives us a few more weeks to market it.

And this -- you've give me the opportunity to -- about how great a title I think it is.

It's really extraordinary, all the early looks are extraordinary.

We have terrific team working on this in Rockstar San Diego, and they are working incredibly hard to complete it.

And we think that's the right window for it, right before -- there is some other competitive titles in the marketplace.

So that's the answer.

And frankly, couldn't be more excited.

I'm a also a believer for what it's worth, that times like these, sort of coming into what we hope is now going to be a more and more robust economic recovery out of tough times, is an uniquely good window to market a western.

Certainly been the case in terms of western movies in the past, and this is basically the biggest scope western, of any western ever made, so we couldn't be more optimistic about it.

And we're happy to have a couple of more weeks to market it.

It does look amazing, but can you quantify the impact on your Q2 guidance by moving the game to Q3?

There a lot of moving parts in our guidance, it really isn't that significant.

Okay, fair enough.

And then on BioShock 2, you mentioned that you shipped 3 million units, can you share with us data points on the sell through of that game, Strauss, and how tight is the inventory should we be modeling, 4 to 5 million units for the year or a range would be helpful.

We don't really talk about that sort of thing, we wait for the information to come out.

However I think we already said, and we repeat, that the retailers are being judicious in their order quantities than they have in the past.

So the title continues to sell, we are really excited about upcoming downloadable content, and the reviews are just off the charts.

So we feel very, very good about it.

And in terms of the model, you will reach your own conclusions, but it's looking very good.

Okay, and then last question on Q2, you mentioned that you shipped 15 million units of packaged good.

Now on the other side, you have both the hard disc and a digital offering, can you reflect on what the attach rate has been on 360 for the episodic through the package good sales?

No, Mike we don't get into that level of granular detail.

And remember GTA4 was the first meaningful downloadable content in the business, and that has continued to evolve since that first came out.

Absolutely, okay, thanks guys, and good job on the quarter.

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.

Can you just update us on how many titles you have in development, I think on the last call you indicated it was approximately 33.

Then can you perhaps share with us, or tell what you say you think where as percentage of revenue, digital content might contribute for the whole year, just seems like that's doing pretty well for you?

Total titles in development right now, Tom, are 31 titles.

And we do expect that growth in our digital revenues going forward, and we will continue to offer downloadable content in promoting our catalog, but we haven't been sharing the percentage in a projected basis.

I will say this the digital side of our business especially on the catalog, if you net all the stuff out, the digital side is small, but very rapidly growing.

I can't quantify it at this moment, the impact on the total year.

But it is a fast growing segment of the business.

Just to expanding on that a little bit, have you seen any other interest from other distribution channels for games in general, and in particular your games?

What do you mean by that?

Just in terms of how you can get your games out to the public through this through digital distribution.

Is there -- are you seeing any interest from anyone else who has a wide distribution of available digital subscribers, or anything along those lines, to come in and want to include games?

Tom, there are kind of two aspects to, that yes.

The answer is, there is.

We put it online to decide, because we had a lot of conversations about that.

A, we do expect more distribution channels to emerge in digital, coming from directions that can of be surprising.

We are also looking closely at some of the emerging markets, where some of the challenges to distributing our products have been related to retail infrastructure.

And along comes the internet, and all of the sudden the games are available to bypass that infrastructure.

And we saw some of that in BioShock 2.

And in Latin America, we saw a big pick up in Latin America.

We are looking at it as a possibility of some of these digital distribution channels opening up in emerging markets.

And emerging markets increasing focus for the Company, as it is for just about every company.

So, do you have anything to add to that?

I think the areas of growth, and we've been essentially doing this organically, are driven by conjunction of taking our strong intellectual properties and re-imagining for new platforms, and the possibility of different kinds of distribution mechanisms.

And the good news is, we and all of our creative teams have a very open mind about the possibilities, what drives us, is the conjunction of economic opportunity and a creative opportunity.

And as Ben said, we also look at it because we are a worldwide market and distributor, we have the luxury of looking at market by market.

So, are we engaged in the MMO business, yes we are, in China, for the sports business.

Are we engaged in social gaming, yes, we are with our Civilization franchise.

Are we involved with iPod and iPhone, yes, we are, with our Grand Theft Auto franchise.

I think what we've done is said, let's use our strength which is our intellectual property we control, and the best creative talent in the business, bar none.

And let's look where the economic opportunity lies, let's look at the geographic opportunity lies, and let's not be conservative about it.

Let's be forward thinking about it.

That said, we have been very reticent to make a Company-wide bet on an acquisition in a new line of business, because we have the great assets.

We have the great creative people, intellectual property, and we have open minds.

And you don't need much more than that.

So the opportunities are great, and what you are seeing when we talk about digital distribution being such a meaningful percentage of our revenues, that was a pleasant experience, but it didn't come as a surprise.

We have been building in that direction since we showed up here.

Thank you.

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

Please proceed with your question.

Hey, good afternoon, guys.

A couple of questions, you have some new Board members on deck, any comment on what their thoughts are regarding the business looking forward?

Second question, with the success of Carnival Games, why haven't we seen another version of that game out?

It's been out for a couple of years now, it doesn't look like there is one on deck for the rest of the year.

So I was kind of curious when we might see the next launch?

We do have three new board members joining us as of the annual meeting, assuming the vote works out, as we fully expect it will.

And we will welcome them, and we think they are going to be strong and valued Board members.

However, we would never single out any Board members opinions, we work together as a team, to encourage robust debate around here across the Board and the peril of being a democratic organization, is you get robust debate, and that includes everyone who is sitting in this room today, and our Board as well.

That said, we all pull in the same direction.

And I fully expect that will be the case going forward.

And Ben can talk about Carnival.

Our Carnival Games, it's a great question.

We all would love to see Carnival Games 2.

The fact of the matter, is Carnival Games 1 is selling so well, that there is no need for Carnival Games 2.

We think that we are pleased, we just announced 6 million units today on Carnival Games, it continues to sell, continues to sell well for new purchases of Wii.

It's a evergreen product.

And when the time comes, we will take a look at that.

We have nothing to announce today.

Carnival Games !

is selling very well now, we don't see a burning need to refresh the

Okay, last question, use of single use codes going forward, what are your thoughts on that?

I think it's a interesting idea.

We are looking at, because everyone else is looking at it, but don't have a point of view at the moment.

I'm sorry, I couldn't understand you.

Could you say that again.

I said, I'm sorry Tony, we don't have a point of view on it at the moment.

We are looking at it.

I think the key thing is we have to be consumer friendly, and we have to be retail friendly.

And at the end of the day, I think I understand where you are going with the question, I think it's much more distinct to think about things like downloadable content.

Okay, thanks guys.

That said, anything is possible, and we are not ruling anything out.

Thank you.

Our next question comes from the line of Atul Bagga with ThinkEquity.

Thanks for taking my call, and congratulations on the strong quarter.

Couple of questions for you, on the digital business, can you talk about what is the kind of margin do you see on DLC, versus digital download versus iPhone, iPad business?

And on Borderlands, can you talk about what are the total sales to date unit sales?

And lastly, can you talk about are you seeing any green shoots, especially in Europe, in terms of the consumer sentiment?

Your third question, last question was about consumer sentiment.

Right.

I think we are -- frankly we're no better on anything else than calling that.

Our own view has been, that there has been tentative return of the consumer, the consumer in our space, in the entertainment space, is going to be highly motivated by the highest quality products in the business, on the one hand.

And by really great bargains, on the other hand.

And we're firmly in the former camp, we put out the highest quality products in the business, they are must have products.

And we always think there is going to be a strong demand for them.

That said, as we said many times before, when the going gets tough, entertainment products are not immune.

And we saw that in the last year and a half.

So in terms of green shoots, I want to make sure we don't confuse our own natural optimism and wishful thinking with what is going on in the market.

Our sense is that this will be a okay year, not a great year.

And what will make it a good year is, if you put out must have products.

And Lainie will take your other questions.

Sure, for our margins on DLC, it's generally following the margins of our packaged goods.

But it can be based on different variables.

For instance, how many units get sold, what the cost of was, is there any royalties to be paid internally or externally?

So it's certainly -- there is wide range of margins for the different types of DLC, depending on the pricing of the products, but we are seeing generally, in the same type of margins of our packaged goods.

For Borderlands,we've now shipped over 2 million units of that game to date.

And it continues to sell.

It's doing really well.

Thank you.

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

Please proceed with your question.

Yes, thanks for taking the call.

Just a quick question on the sports franchise.

GIven the relative success of NBA in the quarter and on going move to reduce infrastructure and increase yield, in sports overall, can you give us update on what the sports business looks like today, x mlb?

We never breakout profitability in sports sectors -- but x-mlb, it's a profitable business.

If you break it out, title by title, NBA is doing fantastically well.

NHL we are taking the year off.

We are pleased with 2nlb game.

And MLB, we kind of just (inaudible) MLB.

And then, there's kind of some of the smaller titles around there.

And we're really, really, really pleased with NBA.

We think we've done a great job.

By the way, we are also really pleased with the MLB game.That's the (inaudible) under contract.

The scores, the early scores are really great.

Huge improvement over last year.

This time last year we had a really tough call because of scores weren't so good.

We stood by our team, and we continue to stand by our team.

They are some of the --not some the best -- they are the best developers in the sports genre.

I'm really, really proud of what they've done.

I would also say this year we have a terrific marketing campaign, that is innovative in the way we always strive to be innovative, and headline making in fact.

And between a great game and a great marketing campaign, we have the best shot we've had in a long time to make MLB a huge success.

That's very helpful, thanks.

Well, that was our last question, thank you for joining us.

I would like to take a moment as we like to do to acknowledge the incredibly strong efforts of our entire team.

It's never easy, it's certainly never easy when you are cutting cost.

And of course, the hardest work, and most important work that's ever done around here, is at our studio level, where people put in really long hours to make the best in interactive entertainment.

And I think it's worth saying, that all of our are immensely grateful to the entire time for all that wonderful work.

Thanks very much.

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

Thank you for your participation.

You may disconnect your lines at this time and have a wonderful day.