Take-Two Interactive Software Inc (TTWO) 2010 Q2 法說會逐字稿

Greetings, and welcome to the Take-Two Interactive Software second quarter 2010 results conference call.

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

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

(Operator Instructions).

As a reminder, this conference is being recorded.

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

Thank you.

Ms.

Buckwalter, you may now begin.

Thank you very much.

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

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

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

Before we begin, I would first like to quickly review our Safe Harbor statement by reminding everyone that the statements made during this meeting 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, 2009, and our 10-Q for the first quarter ended January 31, 2010.

These documents may be obtained from our website.

Now I'll turn the call over to Strauss.

Thank you for joining us.

Today we're very pleased to announce better-than-expected performance and increased guidance for the year.

I'd like to begin by discussing our financial results for the second quarter, then I'll highlight some of our team's recent accomplishments and our outlook for the balance of fiscal 2010.

Net revenue was $268 million, 54% higher than our fiscal 2009 second quarter net revenue of $174.3 million.

Our non-GAAP income from continuing operations of $31.9 million, or $0.34 per share, was a substantial improvement over non-GAAP loss from continuing operations of $3.2 million or $0.04 per share for the second quarter of 2009.

Second quarter results were driven by the launches of BioShock 2, Major League Baseball 2K10, and Grand Theft Auto, Episodes from Liberty City for PS3 and PC.

Our catalog titles performed ahead of our expectations, including continued strong sales of NBA 2K10, Grand Theft Auto IV, and other Grand Theft Auto products as well as Borderlands.

Our digitally delivered offerings were also a meaningful contributor to our results.

Digital represented approximately 9% of our revenue in the second quarter, and was nearly 20% higher than our first quarter of this year.

We're actively seeking additional opportunities to leverage the strength of our brands and maximize the launches of our front-line releases through digital channels.

On the new release front, the most important event this year is the extraordinarily successful launch of Red Dead Redemption.

Developed by Rockstar Games, Red Dead Redemption features Rockstar's epic story telling, rich characters and vast open-role game play.

The title shipped three weeks ago to universal acclaim from the media and extremely favorable responses from consumers and our retail partners around the world.

It's already set new benchmarks for excellence, and has averaged near perfect scores of 95, according to Metacritic.com.

We often talk about Take-Two's commitment to innovation and creative excellence.

Red Dead Redemption embodies that commitment and illustrates the talent that has always been one of our key differentiating strengths.

I would like to thank everyone at Rockstar and everyone at Take-Two for their hard work and congratulate them on delivering a stellar title that illustrates why interactive entertainment is today's most compelling form of art.

Primarily as a result of our successful launch of Red Dead Redemption, and strong second quarter performance, I'm pleased we're increasing our guidance for the fiscal year.

Lainie will provide more detail later in the call.

That said, we believe that 2010 may continue to be challenging for the industry, and for our Company.

Our approach to the business remains prudent.

We're focused on executing our strategy to deliver a select diverse portfolio of the highest-quality titles, and distribute them aggressively across the best platforms and regions.

We'll continue to leverage our proven franchises by leading with our brands to enter new markets rather than using our capital resources.

And we'll seek to improve further upon our execution and efficiency.

Now I'll turn the call over to Ben.

Thanks, Strauss.

I would like to highlight some of our recent products and upcoming releases.

First, I also would like to congratulate everyone at Rockstar for delivering one of the best titles in the history of our Company and the industry with the launch of Red Dead Redemption.

We're very pleased to announce that in less than one month in the market, we have sold over 5 million units worldwide.

Everything about this launch, from the high quality of the title to the execution of the marketing campaign, has been absolutely superb.

Turning a fantastic game into a global consumer event is not something that happens overnight.

It takes the dedication of a world-wide sales force, and the unwavering support of our valued retail partners.

I would like to thank our global retail partners for their help in making this the game event of 2010.

We'll be offering additional downloadable content to the multi-player experience throughout the summer and fall, beginning with the DLC pack containing six exciting co-op missions on June 22.

We'll also be launching the game in Japan this fall.

Red Dead has become an important new franchise for our Company.

One of our goals from the very beginning of our management team's tenure has been to diversify our product portfolio.

In the course of that time, we have developed a consistent pattern of critical and commercial successes.

Starting with Carnival Games, BioShock, NBA 2K, Borderlands, and now Red Dead.

Today Take-Two is more diversified than at any other time in its history, and we have achieved this while pursuing a strategy of publishing a select number of high-quality titles.

Our portfolio illustrates the successful execution of that strategy and includes eight franchises that have sold over 5 million units.

Turning to our biggest franchise, Grand Theft Auto Episodes from Liberty City was well received by PS3 and PC gamers who had been eagerly awaiting the opportunity to experience new stories and characters from Rockstar.

Episodes from Liberty City has been an extremely profitable and creatively successful foray into episodic content.

We believe that Grand Theft Auto IV, and the Episodes will continue to have a long life in the market, as Grand Theft Auto San Andreas did before them.

Consumer demand for this iconic franchise remains incredibly strong.

Grand Theft Auto IV has now sold over 17 million units worldwide.

Borderlands continues to expand its audience and our downloadable content for the game is helping to further drive sales for this exciting new franchise.

Our double-game add-on pack featuring two previously released downloadable offerings in a single retail SKU, provided gamers with more ways to access this premium content at an attractive price.

During the second quarter, we released our first title for the iPad, Sid Meier's Civilization Revolution.

The team at 2K China did a great job of enhancing the popular title by taking advantage of the platform's multi-touch screen and high resolution graphics to deliver an even more fun and addictive game play experience.

We're pleased to expand our relationship with Apple and will selectively introduce more of our franchises on their platforms.

Rockstar will release their award-winning hand held title Grand Theft Auto Chinatown Wars, for the iPad later this month.

Our catalog business remains a key driver for our Company and illustrates the long term benefits of having such a strong portfolio of the industry's top franchises.

With the release of every new AAA title, we are increasing the value of our catalog, and deepening the pool of brands that we can draw upon to expand into emerging markets, platforms and regions.

Building upon our diversity, I would like to highlight some of our key releases for the balance of the year.

On August 24, 2K Games will launch Mafia II, the eagerly anticipated sequel to Mafia that has shipped more than 2 million units worldwide.

Mafia II is being developed by 2K Czech, the talented team behind the original title, and is poised to redefine the genre and immerse gamers in the most authentic and action-packed Mafia game to date.

The game's cinematic Hollywood style meticulously replicates the clothing, cars, music, and culture of the 1940s, and 1950s.

2K has partnered with NVidia to incorporate their physics and APEX technology into Mafia 2 which will make the game's characters and environments incredibly realistic.

The PC version of the title will use NVidia's 3D vision technology which combines high-tech wireless glasses, and advanced software to create a highly immersive experience.

Mafia 2 has been gaining tremendous momentum with the press and consumers.

The game will be fully playable at a centerpiece at 2K's E3 booth next week.

2K is supporting this title with a major marketing campaign that is already underway.

Building upon our leadership position in downloadable content, 2K Czech is creating a series of exclusive content packs that our retail partners, including GameStop, Amazon and Best Buy, will offer their customers who pre-order Mafia II.

Walmart.com will be offering exclusive $10 Walmart e-gift card to their customers who pre-order the game.

In August 2K will launch a comprehensive demo program on XBox Live marketplace, PSN and the Internet that will allow gamers to experience the game leading up to its launch.

Additional marketing activities will include national TV, outdoor campaigns and print and online ads.

This spring 2K Games announced that XCOM, the re-imagining of one of the gaming industry's most storied and beloved franchises is in development with 2K Marin, the studio behind BioShock 2.

The game will combine the strategic core of the ground-breaking franchise with a suspense filled narrative set in a first-person shooter experience.

We're excited about this title and are confident that 2K Marin will leverage their expertise in immersive story telling for XCOM.

As we previously announced last quarter, our fiscal 2010 guidance reflected the potential movement of one of our AAA titles out of the fiscal year.

Today we are confirming that we do not expect to ship Max Payne 3 during this fiscal year.

While we do not take the movement of any title lightly, our recent success with Red Dead Redemption illustrates the importance and the benefit of giving a title the time that it needs in order to fulfill its potential in the marketplace.

The team at Rockstar is focused on making this the best possible experience in interactive entertainment.

Our teams remain hard at work on delivering our AAA titles planned for Q4, including Sid Meier's Civilization V, (inaudible), NBA 2K11 and new Carnival Games.

Last week 2K Sports announced that Michael Jordan, arguably the greatest basketball player of all time, will appear on the cover of NBA 2K11, which is scheduled for release on October 5.

We're incredibly excited to partner with this living legend to take our number one basketball franchise to new heights.

2K Sports NBA 2K10 remains the industry's undisputed basketball champion, and has now shipped over 3 million units.

According to April NPD numbers, the title has 75% market share on Xbox 360 and 66% market share on the PS3 in the US.

Sid Meier's Civilization V has been generating significant buzz since it's February cover story in Game Pro.

The franchise has an enormous fan base and Sid V has been nominated for an E3 reader's choice award by GameSpot.

It was selected as one of the top ten most anticipated PC titles of 2010 by Game Informer.

2K and Firaxis are partnering with Valve to power all PC versions of Civ V with many of Steamworks's features and will offer a special digital deluxe edition on Steam.

Gamers who pre-order any version of Civ V by Steam will receive free downloadable content that will be available on the day that the title launches.

Today we announced new Carnival Games, the latest offering from 2K Play's breakout franchise on the Wii and DS that have sold more than 6 million units worldwide.

The original Carnival Games for the Wii is the third best selling third-party Wii title of all time.

Developed by our Cat Daddy game studio, the team behind the successful brand, new Carnival Games will feature over 30 new games and attractions and hundreds of prizes.

The game will also include expanded multi-player action, and in a first for the franchise, Wii motion-plus compatibility that will provide increased accuracy, enhanced game play and more precision than ever before.

We're excited to build upon the success of this franchise, and believe that the title will be perfectly timed for this holiday season.

2K Play will also have an entirely new lineup of Nickelodeon titles, featuring Dora the Explorer, and Diego, including Dora's Big Birthday Adventure, Dora's Cooking Club, and Go Diego Go Megablocks Build-and-Rescue.

All of these titles will allow children to embrace adventure, learn new skills and celebrate cultural diversity.

We're looking forward to participating in E3 next week.

Rockstar will not be attending or showing any titles at this year's event, but remain hard at work on their games and will continue to support their titles with outstanding marketing campaigns and retail partnerships, as they have done in the past.

E3 promises to be an exciting show for our industry and for our 2K label.

Many of our upcoming 2K releases will be on display and we'll be offering sneak peaks at Spec Ops the line and XCOM.

We invite those who attend to stop by the 2K booth and see our titles.

We're very proud of our recent accomplishments.

We continue to strive to deliver products that set new benchmarks for innovation and creativity, to operate our business efficiently and to bring value to our shareholders.

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

Thanks, Ben, and good afternoon everyone.

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

Please note that all the numbers I'll be providing today will be our results from continuing operations.

The discontinued operations in our financial statements are related to the Jack of all Games distribution list which we sold in February.

In addition, all of the numbers that I will discuss are non-GAAP unless otherwise noted.

Other than net revenue which is not affected by any non-GAAP reconciling items, our press release provides a complete reconciliation of our GAAP to non-GAAP numbers.

Net revenue was $268 million in the second quarter, nearly a 54% increase from $174.3 million for the comparable period a year ago.

Non-GAAP income for the quarter was $31.9 million or $0.34 per diluted share compared to a non-GAAP loss of $3.2 million last year or a loss per share of $0.04.

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 Grand Theft Auto IV, Grand Theft Auto Episodes from Liberty City, as well as our entire catalog led by our GTA titles.

Our catalog business was approximately 32% of revenue in the quarter.

This is partially offset by lower than expected sales of BioShock 2.

The title was well received by the media and was profitable for us.

However, sales slowed down sooner than we had expected.

Our Q2 gross margins were slightly lower than anticipated primarily due to the retail performance of BioShock 2 and the additional promotional support required for the title.

Our Q2 results reflect the estimated retail support we believe will be required for the sell-through of BioShock 2.

Gross margins were also affected by our product mix.

Looking at expenses, our overall operating expenses were lower than forecast, mainly in G&A and R&D.

For G&A we achieved savings during the quarter from reduced professional fees, along with our cost-cutting initiatives and lower personnel expenses.

R&D expenses were lower than expected due to the timing of headcount additions, and higher capitalization rates.

We realized a $1.2 million tax benefit compared to our forecasted expense of $300,000, primarily due to the release of tax reserves during the quarter.

Leading the second quarter sales were BioShock 2, Grand Theft Auto Episodes from Liberty City, Major League Baseball 2K10, and the A2K10 and Grand Theft Auto IV.

Our digitally delivered business was also strong this quarter.

Digital revenue was about $23 million, up from about $19 million in Q1 this year.

Our GAAP results for the second quarter were income of $16.9 million from continuing operations or $0.20 per share compared with a loss from continuing operations of $10.4 million or $0.13 per share in the second quarter of 2009.

In looking at our Q2 results this year, compared to the same period last year, our non-GAAP gross margin for the quarter was approximately 42%, up from 38% primarily due to our product mix and the percentage of our sales at higher average price points this year.

Non-GAAP operating expenses in the second quarter rose from the same period of the prior year, mostly due to a $13 million increase in selling and marketing expenses.

The majority of this increase was from marketing and sales support related to BioShock 2 and Red Dead Redemption.

All other categories of operating expenses declined year-over-year.

G&A expenses decreased by about $4 million or 16% largely due to lower professional fees.

R&D expenses decreased by $2 million, mainly due to higher capitalization rates.

Interest and other expense increased by about $1 million, primarily reflecting higher cash interest expense as compared to last year, as the impact of the higher debt level under our convertible note more than offset our more advantageous coupon rate.

Moving on to our balance sheet, at the end of Q2, we had approximately $181 million in cash.

Our accounts receivable reserves were about $55 million at the end of the quarter.

Reserves were approximately 58% of gross receivables, largely related to the retail performance of BioShock 2.

Inventory at the end of the quarter was approximately $25 million, relatively flat with levels at year end.

Software development cost licenses were up compared to year end, reflecting significant development efforts around our AAA fiscal 2010 releases.

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

We are increasing our fiscal 2010 guidance based on our strong launch of Red Dead Redemption and our better than expected Q2 results.

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

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

Our guidance is based on spot rates as of the time we finalized our forecast.

For the full year, we expect non-GAAP loss per share in the range of $0.10 to $0.30 on $880 million to $980 million in revenue.

This excludes stock-based compensation expense of $0.39 per share, non-cash interest expense on our convertible notes of $0.09 per share, expenses related to our business restructuring, loss-on sale of subsidiaries, unusual legal matters of $0.07 per share, and non-cash tax expense of $0.06 per share.

We expect gross margins 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 launched in 2010 as well as the Rockstar royalty plan which is a profit sharing arrangement.

We continue to expect our Major League Baseball business to lose approximately $30 million to $35 million, or $0.38 to $0.44 per share on a non-GAAP basis, which was included in our fiscal year guidance.

Our fiscal 2010 guidance reflects tax expense of about $5 million, largely attributable to our international operations with an estimated share count of approximately 80 million.

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

For Q3 we expect non-GAAP loss per share in the range of $0.10 to $0.20 on $250 million to $300 million in revenue.

This excludes stock-based compensation expenses of $0.15 per share, non-cash interest and non-cash tax expense of $0.03 per share, and expenses related to unusual legal matters and business restructuring of $0.01 per share.

For Q4 we expect non-GAAP loss per share in the range of $0.10 to $0.20 on $200 million to $250 million in revenue.

This excludes stock-based compensation expense of $0.07 per share, non-cash interest and non-cash tax expense of $0.03 per share, and expenses related to unusual legal matters and business restructuring of $0.01 per share.

Red Dead Redemption is our key release for the third quarter and is expected to drive a significant percentage of the revenue.

Based on the development costs for the title, internal royalties based on Rockstar's profitability, and their product mix for the quarter, we expect overall gross margins in the low 30s.

Our key titles planned for Q4, are L.A.

Noire, Mafia 2, Sid Meier's Civilization V, New Carnival Games, and NBA 2K11.

Based on the mix of titles in the quarter and a relatively large number of internally owned and developed titles, we expect gross margins to increase into the low 40s in the fourth quarter.

We expect overall operating expenses to increase in Q3 and Q4 as compared to Q2 this year.

Primarily driven by higher selling and marketing expenses in connection with our new product launch.

Despite this increase, G&A expense levels still reflect our cost-savings initiatives.

Selling and marketing expenses will be about 20% higher in Q3 as compared to Q2, primarily due to the release of Red Dead Redemption and about 25% higher in Q4 compared to Q2 due to the number of new titles planned for release in the fourth quarter.

G&A is forecast to rise about 30% in Q3, and 20% in Q4 compared to Q2.

Largely due to timing and reductions of expenses relating to legal matters in the second quarter and higher incentive compensation in Q3 and Q4 due to our improved forecast.

For the full year, G&A is expected to decrease by nearly 8% from fiscal 2009.

R&D expenses are expected to grow by about 25% in both Q3 and Q4 in comparison to Q2 as our development studios complete titles, and capitalization rates decline.

Depreciation and amortization should increase by about 5% in Q3 as compared to Q2, and also increase about 10% in Q4 compared to Q2 due to the timing of budgeted capital expenditures during the year.

Our Q3, and Q4 guidance, reflects tax expense of about $2 million in each quarter, primarily attributable to our international operations, with an estimated share count of approximately 80 million for both Q3 and Q4.

I'll conclude by saying that we are pleased with our second quarter results, our strong launch of Red Dead Redemption, and our improved outlook for the year.

We remain focused on executing on our product release schedule for the balance of the year.

Now I'll turn the call back to Strauss.

Thanks, Lainie and Ben.

Our second quarter results and increased outlook reflect the continued hard work and dedication of all of our colleagues.

I would like to thank everyone for all of their contributions.

We're very pleased with our achievements, both creative and financial, during this period, and will endeavor to build upon this momentum and strengthen our position as a leader in the interactive entertainment industry.

We'll now be happy to take your questions.

Operator?

Thank you.

We'll now be conducting a question-and-answer session.

(Operator Instructions).

Our first question comes from Jess Lubert from Wells Fargo Securities.

Good afternoon.

Thank you for taking my question.

A couple of questions actually on the outlook.

First with respect to Q3.

Red Dead has obviously gotten off to an incredible start.

That said, you are still forecasting a loss per share for the third quarter.

Can you comment on whether or not Red Dead will be profitable in the period?

And with respect to the Q4 outlook for $200 million to $250 million in sales, last year you had only one AAA property in the form of Borderlands during Q4 which launched at the end of the quarter.

You still reported $280 million in publishing sales in a pretty difficult retail environment.

This year you are expecting to have LA Noire, Sid Meier's Civilization and Mafia II in the period.

Are you assuming one of these titles could slip, or is there something else that's driving the conservative top-line outlook?

I'll take the first question.

While we invested significantly behind development and marketing in line with the quality and the scope of the game for Red Dead Redemption, it is profitable in the quarter and is on track to become more profitable this year.

So we're really excited about where it is.

It is off to a great start, and we really see a great future and great opportunities for that title.

On the second question regarding the fourth quarter, last year we had NBA also for 2K10.

That has a great launch.

As well as the Borderlands title in Q4.

And also we had the NHL title in the quarter.

And we don't have that title this year.

And we also had a big catalog last year going into the Christmas season, and we're having a prudent outlook towards the retail environment right now.

So we took a very hard look at our catalog and what we thought it could achieve during Q4.

So we're hopeful there will be opportunity there, but we wanted to put in our numbers what we thought as of right now what is going on in the retail environment.

So is NBA planned for Q4 this year, or it is not in Q4?

And can you just give us a sense of confidence regarding LA Noire and Sid Meier's and Mafia, and whether or not they will ship in Q4?

NBA is planned obviously, and that is a release schedule that we announced.

We are taking a prudent outlook towards it.

We did move one title out of the year's, as we indicate din the release.

Yes, and the other titles that you mentioned are planned for Q4, and that's the information we have at the moment, so that's included in our numbers.

All right.

Thank you very much.

Thank you.

Our next question come from Heath Terry from FBR Capital Markets.

Can you give us a sense of what you are seeing so far with Red Dead.

I realize it's a relatively short period so far -- but over the life of the game to date, what kind of pattern you are seeing?

This is a game that doesn't seem to have a whole lot of downloadable content planned for it or at least not that you have talked about as much Is it showing up more in the used-game market, or at least as far as what you can tell from your retail partners?

Yes, let me put it in character, and then Ben will talk in a little more detail about the plans.

We're not announcing right now the pattern of retail.

I think the reviews speak for themselves.

The 95 average Metacritic rating.

Consumers are delighted by the title.

It is ground-breaking.

It has exceeded everyone's expectations in the market, except perhaps the people here.

We've been excited for some time, and I think I said so on prior calls.

We have high hopes for the title.

As Lainie said, it's already profitable in the quarter.

And we're supporting it while trying to maintain a prudent outlook and reasonable tone.

Obviously the team here is just so thrilled and gratified with what we see, and all the feedback from consumers is exceedingly positive.

It's Ben.

I think the nature of your question relates to what we have been seeing across the board in the industry about the quick drop-off of sales on AAA titles.

And one of the things we've been looking for is evidence of legs in the game.

And I think it's fair to say that we are cautiously optimistic that this game does have some legs, and we see sales reflect that.

That said, it's following an erosion curve that every game will follow.

As I say, we're cautiously optimistic.

With respect to downloadable content, we have announced a first pack of co-op play on June 22nd, a number of mission, co-op missions that we're pretty excited about and we think consumers are going to be excited about.

We haven't announced anything further beyond that, but as I said we are cautiously optimistic that this game will be attractive to consumers for a long time to come.

Thanks, Ben.

And one follow-up question to that, then, maybe on a bigger picture kind format, we have seen companies taking different tacks towards the used-game market, whether it's EA, and Microsoft with the registration keys for some of their games, ActiVision may be more aggressively pushing downloadable content, immediately upon the release of the game.

Can you give us a sense of how big a priority you feel like this is for Take-Two?

How important it is?

And whether or not there's a consensus forming around the best way to try to address that erosion curve that's being driven by the used-game market.

I don't want to hazard what drives the erosion curve.

I think there are a lot of factors behind how quickly games erode.

I will state that DLC for us, as much as anything, is about a consumer experience, and providing the best possible experience.

I do think it's fair to say that any AAA title needs some sort of after-market content to be competitive, for any number of reasons, and I think, certainly, we have that memo.

I think the industry generally is still innovating around what that downloadable content or after-market content needs to be.

There's still a lot of experimentation.

We continue to innovate around that.

I think, for example, in Borderlands, we saw some tremendous success in a rapid succession of downloadable content initially and then making it available to retail afterwards, and we're going to continue to see all of that.

So this is really not necessarily about used-game sales.

In fact, as I said in Borderlands, we make the downloadable content available at retailer, as well to make sure as broad as possible an audience has access to our content.

And this is at the end of the day mostly about delighting the consumer, and at the end of the day mostly about enhancing the brands.

One of the ways we look at our business is really about launching brands, managing brands, exploiting brands, and downloadable content is part of that franchise and brand management strategy.

Great.

Thanks, Ben.

Thank you.

Our next question comes from Arvind Bhatia from Sterne Agee.

Thank you, guys.

My first question is, just to be clear, Max Payne 3, you said it's moving out of fiscal 2010.

You did not put it in fiscal 2011, but that's understood, I assume.

And my second question is on Carnival Games.

It says fall but is it in your fiscal '10 or is it in the first quarter of fiscal '11?

And lastly, just on what your plans might be for Natale and (inaudible)

Thanks, Arvind.

No, Max Payne, we haven't announced a release date, to be clear.

Carnival Games, yes, it's scheduled for this fiscal year.

And Natale and (inaudible), our point of view is we really do prior, our creative team is on operating and innovating at the cutting edge, and I think we have been happy that we have done so.

There's always a balance between something new, the investment you make, and what is right for the individual titles.

E3's coming up, I think you'll see some interesting things there.

I don't really want to comment further on it now.

I do think there's some terrific opportunities with these new devices.

Okay.

Thank you.

Thank you.

Our next question comes from Atul Bagga from ThinkEquity.

Thanks for taking my call.

My question is regarding catalogue.

Can you talk about the linearity of catalogue second quarter and what kind of sales you have been seeing so far in third quarter?

And also, what is the kind of impact on the ASPs for catalog sales?

Thank you.

Atul, could you repeat both of those questions?

Sure.

My question was regarding catalog sales, linearity of catalogue sales during the second quarter, and what you are seeing so far in the third quarter, and also what is the kind of impact you are seeing on ASP.

The catalog sales for Q2 were extremely strong in the quarter.

We're seeing that it was higher than our first quarter, and we felt like it really drove the quarter's revenue.

And for the ASPs and catalog sales, we're seeing pretty flat for some of our titles.

It depends on when the title moves into the catalog category.

So it really depends on the life of when those titles start to move into it.

Okay.

And so far in third quarter, have you seen any changes in catalog sales?

We definitely are seeing, the retail environment still seems to be challenging, so we don't feel it will be as strong as Q2.

But we're continuing to work with the retailers on our catalog, and we're going into the summer season, and historically that has been a slower season for industry.

Okay.

Thank you.

Thank you.

Our next question comes from Doug Creutz from Cowen and Company.

Thanks.

Question about BioShock 2, you alluded to on the call how quickly the sales sell off, and we have seen some pretty aggressive discounting at retail on it.

And you talked, I think you said you felt like you'd in your Q2 numbers, you covered what your costs were going to be to support it.

Just to be clear, do you feel like in your Q2 numbers, it reflects what you might have to take going forward in terms of price protection or return on reserves?

Yes.

Okay.

Thanks.

Thank you.

Our next question comes from Eric Handler from MKM Partners.

Yes.

Thanks for taking my question.

So you have had really good success now with Borderlands, and now Red Dead Redemption.

So as you look forward, what measure are you taking right now to ensure that we may be seeing these games, two, three years from now, rather than five years from now?

It's a good question.

I think we're very pleased at the Company's execution across the board and efficiency across the board has improved.

We have a three-part strategy here -- to be the most creative company in the business, the most innovative and the most efficient.

I think, once again, our labels continue to prove that they are the most creative labels in the business.

The Company as a whole is innovating whether that's through trying new platforms, whether it's through development of NBA online in China, or other activities in Asia, expanding our presence in Japan, building up our international sales, and really being on the leading edge, if not the bleeding edge in terms of exploring what new platforms can offer us, whether that's Facebook, or iPhone, or iPad, or other mobile devices.

All the things we explore.

And we do so in a way that is consistent with what consumers want from our titles and what our titles have to offer consumers.

As Ben said, we aim to delight consumers, and to find them wherever they can be found enjoying interactive entertainment.

I promise I'm coming around to your questions, and I know I'm doing it in a roundabout way.

Part of running one of these businesses is making sure that you do come to market regularly with your franchises, otherwise why deliver them?

So it is a balance between bringing out something that's extraordinary, that's off the charts, that can really make a difference on the one hand, and on the other hand managing our cost to development and managing our release schedules.

And there is a bit of tension there, and at times we haven't optimized it.

I think our goal is to optimize .

I think the release of Red Dead Redemption, which was really a terrific combination of A-plus development and A-plus marketing and the commitment of this entire enterprise around the world in a highly organized manner, and you see the results.

I feel like that's a sign that we're moving in the right direction.

And I think our release schedule going forward will reflect that

Strauss, I want to add to that, one of the reasons I hesitate to say this, but one of the reasons that I think Red Dead Redemption was so successful is because it wasn't another franchise.

It was new content, doesn't involve aliens, it involves army people.

It involves a whole new way of looking at an open world entertainment and really takes some of the best of what Rockstar has to offer in terms of new point of view, in terms of delivering something new to consumers that delights them, and king of went left when everybody else went right.

There's always exploiting franchises.

We went ahead and delivered something new, even this late in the console cycle.

This console cycle is full of surprises, and this is one of them.

I take your point and I take Strauss's point, I also think one of the reasons Red Dead Redemption is so successful is because it's not a reiteration of an old franchise.

Thank you.

Thank you.

Our next question comes from Ben Schachter from Broadpoint AmTech.

Congratulations on the success of Red Dead.

A few questions.

Lainie on the FX, can you tell us when you did finalize forecasts so we can get an idea of what those looked like.

And then on Red Dead, I know digital may not be primarily for revenue generation, but what do you think it could generate on the digital side going forward for the rest of the year?

And also if you can give us an update on Agent, is it still an exclusive.

And then finally, Strauss, you mentioned that the industry is continuing to face some difficult headwinds.

Obviously there are macro concerns, but if we remove the macro concerns, what do you think are the specific events or key levers for the industry for the year?

Thanks.

Ben, for your first question on FX, we finalized our forecast in the last few day, so it's based on the spot rates as of those dates and we'll continue to monitor it during the quarter, but we're hoping it averages out to around those numbers.

On the other points, we're not going to project what we think digital distribution will do for Red Dead.

Obviously it's an area of enormous focus for us and the industry, and a great way to reach consumers, and we think there's terrific opportunity across the board for the title.

On Agent there's no change in the situation with the title.

And I sorry your fourth question on macro factors, I wonder if you could pose it again, I'm not sure I followed it entirely.

Aside from the macro economic picture, aside from that, what do you think are the industry-specific events, that will be the key levers for the industry for the year?

Most important thing is putting out good titles.

And hit titles generate sales for our competitors as well as for us.

Getting traffic in retail and getting excitement around the industry is a good thing.

I think all of us are concerned.

We are concerned about the macro economic environment.

Some of the feedback we got from consumers around Red Dead, which was great for us but not necessarily great for others was I'm shifting my spending to buy Red Dead, I can't afford to buy all of the titles in the marketplace.

And I think that's really the concern that I have.

So probably, the only other lever would be announcements of new titles from our competitors that are phenomenal, or unexpected hits theres our competitors.

And frankly, we wish everyone well, because it benefits all of us.

Our additional sales, discounting hardware, more hardware sales obviously benefit us, and other announcements from the hardware side could have an influence on the business.

The biggest factors right now are the interaction of macro economic factors and the nature of the titles that we put out, and all we can control is the nature of the titles we put out and that's what we're focused on.

Great.

Thanks.

Thank you.

Our next question comes from Mike Hickey from Janco Partners.

Thanks, guys.

Congratulations to Rockstar and Red Dead, truly awesome experience.

Just curious, with 2K Marin doing XCOM, what implications that may have on the future of your BioShock franchise.

And following that with the success of Red Dead, what is your philosophy on iterating that in the future?

Hi, Mike.

2K Marine is working on XCOM.

As relates to BioShock, we think BioShock is still one of the most important franchises in the industry.

We do intend to support it.

It doesn't necessarily have to be a 2K Marin but we do intend to support the franchise.

First and foremost, we're focused on downloadable content.

We intend to continue to support BioShock 2 with further downloadable content.

We think the franchise has a long life indeed.

And 2K Marin's focus on XCOM is just bringing another storied franchise to the marketplace.

Which is what we're all about.

With respect to another iteration on Red Dead Redemption, it's pretty much the same answer.

We're focused on delivering new downloadable content coming June 22nd, first, and then further supporting the brand and the title, and then we'll focus on iterations or not as we go down the line.

Today we're focused on making this iteration of Red Dead as successful as it possibly can be.

As successful as it's already been.

We think there's more success coming.

Fair enough.

And another one on Q3 here, can you give us any sort of perspective on your fiscal '11 performance opportunity?

It's too early to talk about that.

And Lainie did you give catalog sales for the quarter?

I missed it if you did.

It's about 32%.

Okay.

Awesome.

Great job, guys.

Thank you.

Our next question comes from Justin Post from Bank of America Merrill Lynch.

Great.

Thank you.

Most of my questions have been asked.

But one question on gross margins in the third quarter, obviously very successful title with Red Dead.

Is that a framework for how gross margins will look under a successful Rockstar title release?

Are there any abnormal puts and takes in the quarter?

Thank you.

For Q3 we mentioned our gross margin was going to be in the low 30s, and that is driven by Red Dead Redemption in the quarter, and that title has some significant development costs associated with it, and significant internal royalties based on Rockstar's profitability.

So I wouldn't say that that would be the normal for an internally owned and developed IP.

So if you look at Q4, where we have some more titles coming out that are internally owned in IP, we're running in the low 40s, which is probably more of the norm for the Company.

Great.

Thank you.

Thank you.

At this time, we have no further questions.

I would like to turn the call back over to Strauss Zelnick for any closing comments.

First of all thanks so much to everyone for joining us.

Obviously, this is very much a good news call, and at the risk of being highly repetitive, all of us here want to thank all of our colleagues for the extraordinary work that they have done.

It's awful hard to put out something ground breaking over and over again.

The folks at Rockstar keep setting the bar higher and then keep exceeding their own goals and everyone's expectations, and we just couldn't be more thrilled or grateful.

We're grateful to all of you for your support.

Thanks so much.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.