Take-Two Interactive Software Inc (TTWO) 2010 Q3 法說會逐字稿

Greetings and welcome to the Take-Two Interactive Software third 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 Ed Nebb, Investor Relations for Take-Two Interactive.

Thank you.

Mr Nebb, you may now begin.

Thank you very much, and thanks to all of you for joining us for our third quarter conference call.

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

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

Before we begin, I would first like to quickly review our Safe Harbor statement by reminding everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws.

The forward-looking statements are based on the beliefs of our management as well 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 second quarter ended April 30, 2010.

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

With that, I'll turn the call over to Strauss.

Thanks, Ed.

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

Today we're exceedingly pleased to announce significantly stronger than expected third quarter results.

Our financial performance is a clear reflection of the Company's focus on several key objectives.

Building on the talents of our world class creative teams to produce AAA titles, increasing the diversity and breadth of our product portfolio and delivering it to a broad range of audiences.

Pursuing emerging opportunities in new distribution channels and regions by leading with our proven intellectual properties.

Establishing a solid financial foundation characterized by more efficient operations and a strong cash position.

I'll briefly review our results for the third quarter.

Then I'll highlight some of our team's recent accomplishments and our strength and outlook for fiscal 2010.

Net revenue was $354.1 million, our non-GAAP net income was $26 million, at $0.28 per share.

We ended the third quarter with $232 million in cash.

In particular, our third quarter results were driven by the exceptional performance of Rockstar Games Red Dead Redemption, which is one of the highest rated titles of this console generation.

The game has sold in more than 6.9 million units worldwide.

Red Dead Redemption illustrates our unparalleled ability to create compelling, interactive experiences that resonate with consumers.

Our third quarter results also benefited from the continued strength of Take-Two's catalog, including Grand Theft Auto Episodes from Liberty City, Grand Theft Auto IV, NBA 2K10 and Borderlands.

Digitally delivered offerings again were a meaningful contributor to our results.

We continued to capitalize on new and emerging opportunities to maximize the value of our front line releases and leverage the strength of our brands through digital channels.

As a result of our exceptional third quarter performance, the continued strength of Red Dead Redemption, and our promising lineup for this holiday season we're increasing our guidance for the fourth quarter and the fiscal year.

Lainie will provide more detail later in the call.

We now expect to achieve one of the paramount goals that this management team set on day one.

To operate the Company profitably in a year without a new Grand Theft Auto release.

This will mark the first time in nearly a decade that the Company has been able to accomplish that goal.

We have always believed that this was an achievable objective for Take-Two and through the hard work of all of our colleagues, we're poised to reach that milestone.

We continue to believer that the year may remain challenging for the industry as a whole and for our Company, and therefore we're maintaining our prudent approach to the business.

Our third quarter results and our full-year outlook demonstrate that we're well on the way to creating a new Take-Two, one that can deliver performance from the diverse portfolio of world class titles.

While there is understandably strong interest in the timing of our next Grand Theft Auto title, we've shown that our business is about much more than that iconic brand.

In addition to our Grand Theft Auto franchise, the industry standard bearer our portfolio now includes Red Dead Redemption, BioShock, Borderlands, NBA 2K, Midnight Club, Sid Meier's Civilization and Carnival Games.

Each of these titles ranks among the industry's most successful properties and each of our labels is contributing to our success.

Red Dead Redemption is an excellent example of what we can achieve, delivering an absolutely superb entertainment experience.

We believe that Take-Two now has the strongest intellectual property portfolio in the business and that portfolio translates into profits.

Now I'll turn the call over to Ben.

Thank you, Strauss.

I'd like to begin by saying how incredibly proud I am of our third quarter results and the improved outlook for the fiscal year.

Our performance and especially our ability to deliver profitability in a non-GTA year underscores the progress that we have made in building Take-Two for the future.

Today we are better positioned creatively, financially and geographically than at any other time in the Company's history.

We're also more diversified than at any other point in our business.

I'd like to review some of our recent products that have led us to this point and then discuss some of our upcoming releases.

Red Dead Redemption is an ongoing phenomenal success and illustrates our ability to deliver games that raise the bar for excellence in our industry.

At a time when consumers have continued to be highly discerning with the way they spend their money, Rockstar Games has proven that innovative AAA experiences can still command a blockbuster audience and market share.

In addition to Red Dead Redemption's strong single-player experience the multi-player game has kept users coming back for more with a steady stream of downloadable content.

With more compelling DLC on the horizon, we believe that Red Dead Redemption is poised to remain one of the most played titles of the year.

Gamers are eagerly looking forward to the Liars and Cheats Pack and the Undead Nightmare Pack which will introduce zombies to the Wild West setting of the title.

Rockstar is also preparing for the eagerly anticipated launch of Red Dead Redemption in Japan.

We're enthusiastic about the reception that the title has received from the first parties and retailers leading up to its October 7, launch.

Initial indications are very strong.

We are anticipating a blockbuster launch that will build upon our success in North America and Europe.

Our catalog continues to be one of the strongest in the industry.

Sales of our Grand Theft Auto, NBA 2K10 and Borderlands titles illustrate the importance of having established brands that remain relevant to consumers and offer value.

We continue to enhance the depth of our catalog and to leverage it through new platforms, business models and territories.

We've increased our focus on digital properties, from downloadable packs and full PC games to offerings for the iPhone and iPad, we always lead with our brands to make our content available to consumers where, when and how they want it.

These initiatives, coupled with our strong relationships and marketing programs with traditional retailers, ensure that we are taking advantage of the expanding market for interactive entertainment.

Last week 2K Games launched Mafia II, the eagerly anticipated sequel to Mafia.

We're very proud of the game which features incredible action including car chases, explosive gun play, compelling characters and an engaging narrative that meticulously recreates the 1940s and 1950s.

Mafia II was developed by 2K Czech, an extremely talented studio.

Based upon the initial launch we expect this to be another profitable title for Take-Two.

We announced that Irrational Games is currently working on the next game in the highly acclaimed BioShock franchise, BioShock Infinite.

The game will present an entirely new narrative experience that lifts players out of the familiar underwater city of Rapture seen in BioShock and BioShock 2 to Columbia, an immense city set in the sky in the year 1912.

It is being developed by the team behind the original BioShock including the studio's President and Creative Lead, Ken Levine.

We're very excited about this new direction for the franchise and the initial response from the gaming community has been incredibly positive.

The game was the talk of the recent Gamescom events in Germany and won IGN's Game of Show Award.

It'll also be featured on the cover of this month's issue of Game Informer magazine.

BioShock Infinite is planned for release during calendar 2012.

On August 24, 2K Sports released NHL2K11, its third ground breaking hockey release exclusively for the Wii.

Fans of true simulation sports will quickly appreciate the game's compatibility with the Wii Motion Plus that provides intuitive one-to-one motion control.

In addition, NHL 2K 11 will introduce the all new Road To the Cup mode, featuring Mii characters battling in mini games, trivia challenges and skills competitions.

Now let's look at our lineup for the balance of the year.

As noted in today's press release we now expect to ship LA Noire during the first half of calendar 2011.

Using ground-breaking proprietary technology, LA Noire will deliver a revolutionary game play experience that has never been seen before in our history.

We showed the game at a recent GameStop Manager's meeting, where it received an incredible response.

We're confident that the investment of additional time will translate into another commercial and critical hit for our Company.

Rockstar will release Grand Theft Auto Chinatown Wars HD for the iPad in early September.

The game was originally released on the Nintendo DS in March 2009, since then it has launched on multiple platforms including Sony PSP, iPhone and iPod Touch and has sold in more than 2.2 million units worldwide.

We're excited to bring the ultimate handheld Grand Theft Auto experience to the next generation of Apple devices.

This iteration takes full advantage of the new hardware and screen size with high resolution graphics.

2K Sports is gearing up for the October 5, launch of NBA 2K11.

Featuring NBA legend Michael Jordan, this year's game promises to build upon the commercial and critical success of our industry's number one rated and number one selling basketball franchise.

Pre-orders for NBA 2K11 have been very strong.

The title will feature the Jordan challenge mode that allows gamers to relive ten of his most famous games and an unlockable MJ Creating a Legend mode which enables him to play on any of today's NBA teams.

NBA 2K11 will be our first title to support the new PlayStation Move controller and 3-D graphics on the PlayStation3.

We're very excited to be incorporating these new technologies into our titles and are confident that it will enhance what promises to be another incredible season for NBA 2K basketball.

For those gamers that can't wait until the launch, NBA 2K Sports will release a playable demo on Xbox 360 and PS3 later this month.

On September 21, 2K Games will release Sid Meier's Civilization V, one of this year's most eagerly anticipated PC titles.

The Civilization franchise which has sold millions of units worldwide, is one of the industry's most successful and beloved strategy game series and is famed for its addictive just-one-more-turn game play.

Civilization V takes this game series in new directions with the introduction of hexagon tiles that allow for deeper strategy, more realistic game play and stunning organic landscapes for players to explore as they expand their empire.

The game won numerous awards during E3 including Best Strategy Game from the E3 critics, IGN, Machinima and Game Informer who also gave the title its Best PC Game Award.

Building upon those accolades, Civilization 5 is featured on the cover of this months PC Gamer magazine who gave the title their Editor's Choice Award and a fantastic review score of 93.

We're very proud of Sid Meier and the team at Firaxis and we believe that this further demonstrates our unique ability to deliver multiple high quality titles.

We'll also introduce new BioShock 2 and Borderlands downloadable content packs that will enhance and deepen those game play experiences.

This fall, 2K Games will build upon their success with Borderlands by releasing a special Game of the Year Edition that will include the full version of the game, tokens to download all four add-on packs and a special map of the in-game world.

We think that this definitive collection will provide gamers who haven't yet played Borderlands with an incredible game play experience and value.

2K Play will have several titles that are perfectly timed for this holiday season.

New Carnival Games for the Wii and DS will build upon our popular franchise that have sold more than six million units world wide and is among the best-selling third party Wii titles of all time.

Developed by our Cat Daddy Games studio, the team behind the original title, New Carnival Games includes more than 30 new games and attractions and hundreds of prizes.

In addition, the game will feature expanded multi-player game play and be compatible with the Wii Motion Plus.

2K Play will also introduce our Company's first foray into the fitness category, Nickelodean Fit.

Designed exclusively for the Wii and compatible with the Wii balance board, Nickelodean Fit provides a new way for kids to stay physically active as they engage with their favorite characters--Dora, Diego, Kai-lan and the Backyardigans.

Developed in collaboration with physical education and exercise science expert Dr.

Jackie Goodway, Nickelodean Fit features 30 exercise games.

We're excited to introduce a product that helps address the need for children to engage in physical activity and begin a path to a healthy lifestyle.

2K Play also will have an entirely new lineup of Nickelodean titles featuring Dora the Explorer, Diego, and Mega Bloks Build & Rescue, which will enable children to celebrate cultural diversity, learn skills, and experience adventures with their favorite characters.

I'd like to add one point about our operations.

As part of our ongoing commitments to improve the efficiency of our business, we implemented a targeted staff reduction at our Rockstar San Diego for access and visual concepts development studios in order to properly align their resources with their current and future goals.

I want to thank our employees for their hard work.

For the past three years they have been focussed on execution, creativity and innovation, and that has resulted in an incredible quarter and a very strong outlook for the year.

We have made and continue to make significant progress and are providing a solid foundation for our future.

We'll aim to build on these successes and continue to strengthen Take-Two's potential as a leading global interactive entertainment Company.

Thank you, I'd like to turn the call over to Lainie.

Thanks, Ben, and good afternoon, everyone.

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

All of the numbers I'll be providing today will be results from continuing operations.

Discontinued operations in our financial statements related to the Jack of All Games distribution business 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 an non-GAAP reconciling items.

The tables included in our press release provide a complete reconciliation of our GAAP to non-GAAP numbers.

Net revenue was $354.1 million in the third quarter, a 273% increase from $94.9 million for the comparable period a year ago.

Non-GAAP net income for the quarter was $26 million or $0.28 per diluted share compared to a non-GAAP net loss of $52.3 million last year or a loss per share of $0.68.

Our results significantly exceeded guidance with the performance of Red Dead Redemption being the key factor.

In addition we have increased our lifetime projections for the title which positively affected the amortization of our development costs in the third quarter.

Other contributing factors were overall operating expenses were lower than forecast, mainly in general and administrative and selling and marketing expenses.

Factors driving the G&A reduction included income from a legal settlement and expense savings due to cost cutting initiatives.

Selling and marketing expenses were lower than we expected due to the timing of marketing expenses for current and future releases.

R&D expenses were in line with the forecast for the quarter.

Tax expense was $1.3 million higher than forecasted, primarily as a result of the quarter's performance.

Our GAAP results for the third quarter were income from continuing operations of $12.4 million or $0.14 per diluted share, compared with a loss from continuing operations of $58.3 million or $0.76 per share in the third quarter of 2009.

Leading the third quarter sales were Red Dead Redemption, Grand Theft Auto Episodes from Liberty City, Grand Theft Auto IV, Major League Baseball 2K10, NBA 2K10 and Borderlands.

Our digitally delivered business was also strong this quarter.

Digital revenue was about $18 million up by $11 million as compared to the same period last year.

Our non-GAAP gross margin for the third quarter was approximately 34% up from 20% in the third quarter of the prior year, primarily due to the successful launch of Red Dead Redemption.

We did not have any key releases in the same period last year.

Non-GAAP operating expenses in the third quarter rose from the same period of the prior year mostly due to a $22 million increase in selling and marketing expenses.

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

G&A expenses decreased by about $3 million or 12%.

The improvement included approximately $2.5 million of income due to a legal settlement and lower salary expense as a result of our cost-cutting initiatives.

Although this was partially offset by increased performance based incentive compensation.

R&D expenses increased by $2 million, mainly due to lower capitalization rates based on the timing of key releases.

Interest and other expense was relatively in line with the prior year.

Moving on to our balance sheet at the end of the third quarter we had approximately $232 million in cash.

Our accounts receivable reserves were about $49 million at the end of the quarter.

Reserves are approximately 34% of gross receivables largely related to the retail performances of BioShock 2.

Inventory at the end of the quarter was approximately $21 million slightly lower than year end and last quarter primarily due to higher inventory reserves.

Inventory was up from Q3 2009 due to the increase in titles released this year.

Software development cost licenses were slightly down compared to the second quarter reflecting the amortization of development spend on Red Dead Redemption offset by our continued development costs on key future releases.

Compared to year end Q3 2009 software development costs were higher due to the continued investment in our pipeline.

Accrued expenses and other current liabilities were up significantly compared to year end and the prior quarter primarily due to increased accrued internal royalties due to the Company's performance in the quarter.

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

We are increasing our fourth quarter and fiscal year 2010 guidance significantly and are now forecasting a profit for both periods.

The higher guidance reflects our solid third quarter performance as well as the continued strength of Red Dead Redemption, increased expectations for our Q4 releases, and changes in our release schedule.

In addition to our release schedule assumptions, the expected results may be affected by variability and foreign exchange rates.

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

For the full year we expect non-GAAP net income per diluted share in the range of $0.60 to $0.70, on $1.05 billion to $1.1 billion in net revenue.

This excludes stock-based compensation expense of $0.30 per share and expenses of $0.18 per share related to certain other non-cash, non-operational gains and losses that are detailed in the press release.

We continue to expect our base mall business to lose approximately $30 million to $35 million or $0.30 to $0.35 per share on a non-GAAP basis which is included in our fiscal year guidance.

Our fiscal 2010 guidance reflects tax expense of about $7 million largely attributable to our international operations.

Our estimated share count is approximately 98.4 million for fiscal 2010 including 6 million of participating shares of our invested restricted stock grants.

The share count also includes 13 million of dilutive shares underlying our convertible bond.

If converted the higher share count would be offset by a reduction in debt.

For Q4 we expect non-GAAP net income in the range of $0.20 to $0.30 per diluted share on $270 million to $320 million in net revenue.

This excludes stock-based compensation expense of $0.06 per share and expenses of $0.03 per share related to certain other non-cash and non-operational gains and losses as detailed in the press release.

Our key releases in Q4 are Mafia II, NBA 2K11, Civilization V, New Carnival Games, Nickelodeon Fit, and NHL 2K11.

Based on the mix of the above Q4 releases as well as continued sales of Red Dead Redemption, we expect gross profit margins to increase into the low 40's for the quarter.

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

G&A is forecasted to increase in Q4 by approximately 17% as compared to Q3 primarily as a result of approximately $2.5 million of income due to a legal settlement in the third quarter.

R&D expense and depreciation and amortization in the fourth quarter should remain relatively flat as compared to the third quarter.

Based on our Q4 forecast we expect to show about $3 million of tax expense primarily attributable to our international operations.

Our estimated share count is approximately 98.8 million, for Q4.

This includes 6 million of participating shares for our unvested, restricted stock grants and 13 million of diluted shares underlying our convertible bond.

As mentioned earlier, if converted, the higher share count would be offset by reduction in debt.

To wrap up, we are looking forward to a profitable fourth quarter and fiscal year.

Closing on our focus on AAA games' increasingly diverse portfolio, growing distribution and improved operating efficiency.

We are in the midst of our 2011 budgeting process and we expect to have more to say about 2011 and future releases on our next conference call.

Now I'll turn the call back to Strauss.

Thanks, Lainie and Ben.

Again, we'd like to thank our colleagues for their dedicated efforts to building a new Take-Two.

We're very proud of our accomplishments and excited about our prospects for the balance of this year and beyond as we continue to strive to improve and grow our business.

We'll now be happy to take your questions, Operator?

Thank you.

We will now be conducting a question-and-answer session.

(Operator Instructions) One moment, please, while we poll for questions.

Our first question comes from Mike Hickey from Janco Partners.

Hi Strauss, Ben, Lainie and Ed, congratulations on your turn around.

I'm curious, Lainie, if you mentioned what catalog was for the quarter?

Then Strauss, it looks like major franchises from Rockstar are coming every three years or so, and I was wondering if that is a philosophical pacing from the Rockstar team in order to manage the fatigue level there or is that just capacity constraints?

Hi, Mike , it is Lainie.

The catalog for the quarter was 14% of publishing sales.

That was--the dollars were pretty strong, but as a percentage of overall sales due to Red Dead Redemption the percentage was lower than it was in the prior

And to your point about franchises I wouldn't really distinguish between 2K and Rockstar.

I think you're right that the bulk of what we do, because we aim to produce and distribute only the highest quality titles in the business, the bulk of those are really not suitable for annualization although there are exceptions.

We think, first of all, if you're really putting out something ground breaking, you risk of tiring consumers if you do it annually.

It takes time to do something ground breaking over and over again.

No, we're not on a fixed schedule at all.

We really want to take the appropriate time to create the title and then give the title an appropriate rest from a marketing point of view.

I would add to that, Strauss, that we believe Take-Two now has the strongest portfolio IPs in the business.

Not only does that portfolio calibrated to profits, But it enables us to give the franchise the time that it needs because we can fill in with other products.

We're not a one-product company or two-product company, we can be multiple-product company.

We can afford to give individual franchise time that they need to develop.

Okay.

Thanks, guys.

Thank you.

Our next question comes from Arvind Bhatia from Sterne Agee.

Thank you, I'd like to add my congratulations, as well, guys.

Couple of questions.

Your first one on Japan, the launch of Red Dead Redemption, should we assume that the pricing and economics are going to be very similar to what you have here, my first question?

And then the shift of LA Noire into next year, can you talk about kind of the reasoning behind it?

I know typically it is you want to give the game more time, but is it also any timing issues in term of when you want to launch it?

Is that a better window?

And then the last question is on head count.

If you could just touch on what the head count is in development right now.

Thanks, Arvind, I'll answer the question about Japan, Strauss will answer your question about LA Noire and Lainie will cover your last question.

On Japan there are two distinguishing things, two economic factors that you should bear in mind.

One is that Take-Two became publisher in Japan a few quarters ago which leads us to -- leads that territory to provide higher margins for us.

We rely on the third party to do physical distribution of the actual sales, but we are a publisher with respect to first parties and that leads to higher margins.

That is number one.

Number two, in case you're not aware, Japan is distinguished because it is a no returns territory.

So while we have price protection and sometimes potential on return especially on PC products, but the price point when retailers take it, they take it and we don't have any further responsibility for it.

Arvind, thanks, on LA Noire, yes, obviously when we schedule a title we're trying to be mindful of at least two issues.

First, how long does it take to put out an A-plus title, and when you're trying to do something ground breaking it can take a while and I think we have tried very hard to balance appropriately a desire to have a rational release schedule with a desire to put out AAA titles, every time we push the envelope creatively, it takes a while.

And in this particular instance, I'm not going to disclose all the advancements that are pretty extraordinary, they are complex, and worth waiting for.

Equally, you're right, we do try to pick the right marketing window.

That is important.

One of the things that we're proud of around here, I think we've extended the market window.

I think we've shown the market that if you put something fantastic out people come out for it.

And that is true, pretty much year round.

That said, we do want to be mindful of what the competition is doing and don't want to stack up a release unnecessarily.

These are expensive products.

One of the things I think we found with Red Dead to our happiness from our point of view, is that we were able to crowd out some of the competition because the best title in the market won the day.

We get criticized often for titles' movement or not being on time and not on budget.

I pointed out in the past, but I'll -- worth repeating on the call that Red Dead Redemption took down any number of titles that were both on budget and on time.

And so while we always strive to achieve greater predictability in our business and it is a goal of our Company to get better at predictability, if a title needs more time, it needs more time, we are willing to give it.

We serve no wine, before it's time.

I will say about LA Noire, that as I look around competitively at the marketplace there is nothing else quite like it in terms of the game play and in terms of the technology behind it.

There really is nothing quite like it and we want to make sure we get it absolutely right.

In terms of the development personnel currently at the end of the quarter we have 1,600 development staff.

Great.

Thank you, guys.

Thank you.

Our next question comes from Daniel Ernst from Hudson Square Research.

Good evening, thanks for taking my call.

Three questions if I might.

The first question is little difficult to ask and probably reasonably difficult to answer, but if you look at the concept of Take-Two delivering material profits in a non-GTA year and that was the thesis when you guys joined and it was our thesis a year ago, obviously a lot of people had numbers around the $0.50 and $0.60 range for this year, which we're all disappointed to lower to a $0.30 or $0.40 loss and now we're back up to even better than we were a year ago, $0.60 or $0.70 profit.

If you can take me through that progression, I don't think it is just Red Dead.

Could you comment on that?

My second question, I hate to ask, which is the what's next question, can you give us a little bit of thoughts on how you're thinking about FY 2011.

I know we know some of the titles like LA Noire which you just talked about, and we have Special Ops and Max Payne, but how you're feeling about the profitability, again absent what we do or don't know about another GTA title.

And then the third question talk a little bit about gaming on the iTunes or app platform.

You've got Civilization up there already and now you're launching the GTA top-down game for the iPad, so if you can comment on what you're seeing on progress on revenues from Apple.

Thanks.

Daniel, it's Lainie.

The Take-Two - when you look at the numbers for what we gave out in December versus where we are right now, Red Dead is a huge success for us, so obviously that is the big driver of us turning to profitability.

But when we look back at that time, if you think about some of the other titles that we had in the release schedule that didn't actually make the year, I mean, those titles as well as the economic environment and what we were seeing, some of our other titles and how they've performed, it's really not about one specific title when we put our numbers together, it is a multitude of titles and one title hitting big can really change the landscape, which it did for us this year.

For fiscal year 2011 we are currently in our budgeting process so we're not ready to, really talk about it in much details there.

But we have announced that Spec Ops is going to be in the year, LA Noire and we also mentioned that XCOM will be in the calendar year 2011.

So those are some titles you can look forward to in the near future.

Finally Dan, I'm not sure what the nature of your question is on the Apple iPhone, I think when we look at new opportunities we look first and foremost to leading with our brands.

We don't lead with our capital, we lead with our brands.

If you look at the top apps for games on the Apple platforms, they're almost all brand extensions of games that are successful in the console market.

We'll continue to do that.

We'll continue develop our brands, close the existing ones and develop new ones on the console market.

And bring them over to the Apple - the iPad and the iPhone and the iTouch, and we think it is a fantastic market what Apple is doing is unbelievable amazing.

We're big fans.

We just need to make sure that we manage our brand appropriately and that the experience matches expectations and matches price points.

Great.

Thanks for the color.

Thank you.

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

Thanks.

Your new fiscal Q4 guidance is a pretty big lift from where you implied it was going to be before.

I'm just wondering on the revenue line how much of that you think is going to be coming from your downloadable content slate which is pretty robust and if you can give us some color about how the Legends and Killers Pack has done since you released it.

Thanks.

Doug, it's Lainie.

For Q4 we do have some additional digital offerings that are going to be in the quarter but we don't give any detail on a title by title basis.

There are a lot of other things that are really driving that quarter.

NBA looks amazing, our pre-orders are up from last year, and Mafia II is really off to a great start as well as higher expectations for Red Dead Redemption in the quarter.

That is -- those are the big drivers.

All right.

Thanks.

Thank you.

Our next question comes from Atul Bagga from ThinkEquity.

Hi guys, thanks for taking my call.

Congratulations on a great quarter.

A couple of questions for you.

So, digital you mentioned (inaudible) of revenue, I was wondering if you could share how much of that is DLC and what portion of that is Apple and other platforms?

And what is your philosophy on Facebook and Apple games, is it more about broadening the funnel or do you see this becoming a meaningful revenue opportunity for you?

For the digital, for the quarter, we don't give specific detail on how we break that down but overall it was $18 million in the quarter which was up from last year at this time.

On Facebook and other platforms I think Ben said it well, we make it our business to bring our intellectual property to consumers around the world when, how, and in what form they want it.

As long as it meets our standard of delivering a AAA experience.

What we're not doing is taking our properties, importing them to dumbed down versions of a great game.

Everything we have has to stand on its own as a superb experience for consumers.

The Facebook platform to date has really been largely a social gaming platform.

Those have typically been pretty light game, pretty addictive games and no doubt a lot of people have made a lot of money doing that.

We're beginning to experiment and we're bringing Civilization to social gaming and we're looking forward to seeing how it will do.

The same way we brought our titles in really high quality ways to other platform was whether that is the DS or the iPhone or the iPad.

In all instances we're going to be driven by a desire to delight consumers and a desire to do something that is really high quality and as Ben said we're leading with our brands, with our development, with our marketing, we are not leading with our capital.

So will Facebook be an interesting platform for us?

You certainly don't want to turn away from a platform that has 500 million users.

It is a wonderful opportunity.

At the same time we have to deliver a AAA experience and that's what we're focussed on figuring out.

I think you'll hopefully looking forward to seeing us experiment.

Right now, small profit contributor, in the future perhaps a larger one.

Makes sense.

Second question, how should we think about number of titles launched in the new year and how many new IPs and non-annual release titles you plan to launch in any given year?

The release schedule kind of shapes up over time and we don't specifically have a number of titles that we target to release in a year.

We're very development oriented as Strauss said.

We're AAA.

We're convinced that even in social gaming, Facebook gaming that all of those games are going to have to go into AAA land and creating 90-plus games is hard, hard, hard.

And we wouldn't want it any other way.

We wouldn't want to say we're going to deliver 80 games but we're going to deliver five in a year or ten in a year.

We're focussed on delivering titles when they're ready, focusing on delivering great experiences.

As you mapped out, against a catalog that continues to perform strongly and gives us greater visibility, less volatility as the catalog becomes more and more important, and great profitability.

And I think as we focus on -- we have never gone wrong on focusing on great quality and that's going to guide us, not any particular volume of titles being released in a given year.

I think you'll pretty much look forward to seeing - we've seen, the SKU counts are roughly what it is.

We've prided ourselves on launching a couple of new intellectual properties a year and more to the point on launching big hits every year.

This year is a standard bearer for that with the launch of Red Dead Redemption and not just Red Dead Redemption, other hits, too.

Thank you.

Thank you.

Our next question comes from Eric Handler from MKM Partners.

Hi, thanks for taking my call.

Two questions, first, just to sort of size the Japanese market, one, you can sort of give an indication of how well GTA Force sold there.

Also then when you look at your cash now, you're up to $230 million in cash, thoughts on how you might use that cash or your excess cash going forward.

Thanks, Eric.

On the size of GTA -- the question is GTA4 in Japan?

Yes.

We'll get back to you on it.

I don't have it in front of me.

I'd say, well -- I won't give the order of magnitude but we'll get back to you on the number.

Strauss, you want to talk about cash?

In terms of cash, obviously the cash reflects to back that we're having a profitable business and we are building up our cash reserves.

We have an exceedingly solid balance sheet.

We think that is important in a business where there is an element of risk, there's an element of volatility, and these titles are expensive to produce and market.

So we feel like we're in very sound shape.

I think it is worth pointing out that this does give us a good deal of flexibility as opportunities present themselves, and it's allowing us to be expansive in our expansion around the world, our expansion into other markets, our expansion into new products and new intellectual properties.

Just as one small example of that, our efforts in China to build and launch a massive multi-player game in association with Tencent with NBA.

Now, it's consistent with our strategy of geographical expansion, it is consistent with our strategy of expanding the type of products we do.

And yet we are leading with the brand not primarily with capital.

The good news is that we have the capital if we need it.

I would say Eric, it is $230 million in cash, there's convert out there, but also there is a credit facility that's completely undrawn so we have a lot of flexibility.

Okay.

Thank you.

Thank you.

Our next question comes from Edward Williams from BMO Capital.

Good afternoon, just to follow up, first of all, on Strauss, your answer to Eric's question.

Can you give us an update as to where you are with NBA 2K and Tencent in China and what the next milestones might be that we hear about?

Let me put it this way, things are progressing.

It is a strategic priority for the Company.

I'd say that our relationship -- our development relationship with Tencent is as good as it gets.

It is not to say there aren't issues every now and then, but I think it is as good as these relationships go.

We think we're going to deliver a top notch game.

We think that we've got the right partner.

We think that it could be tremendously successful.

Having said that, it's the first time that somebody's taken a AAA kind of game the way NBA 2K is a AAA game and putting it on top of an online platform.

The way these things roll out, it's not going to be launched, it'll go through consumer testing and closed beta and open beta.

We're not announcing the closed beta yet when we do, we'll get back to you.

We're working diligently to get to that point.

Okay.

And then just to follow up to that, I assume that at some point you may want to take this game outside of China, and if that is the case, can you talk about how that may happen?

Do you have the rights to the MMO version of NBA 2K outside of China or is that something that you'd be sharing with Tencent.

I didn't catch the question.

Can you repeat it?

I'm curious if you were to take the MMO version of NBA 2K outside of the Chinese market, is that something you own the rights to or is that something that you'd be sharing with Tencent.

We're not prepared - it is a detail of the Company that we're not prepared to discuss publicly.

Okay.

And then just a couple of other questions.

If you were to look at the iPhone and the iPad, can you comment a little bit of what sort of impact you've seen the Apple platform have on the DS and the PSP and then as a follow-up to that, do you see using windows of availability as you take properties through various platforms, especially as a means of combating a potential issue with the price point of the iPad software?

Yes, I don't have a sense of how the platforms will interact.

The good news is an extraordinarily large demand for interactive entertainment.

It's growing rapidly.

It's really the only growth area in entertainment.

Each of these platforms is good at doing different things.

What is interesting about a tablet in general and the iPad specifically, is the screen size.

And potentially the processing power, and that tells you that it's going to have the different creative capabilities than a small screen.

No question about it.

How it's used, remains to be seen.

How deep the applications are, remains to be seen.

I suspect tablets will be largely a portable device and therefore games probably will be consumed differently than they are in consoles, but I could be mistaken about that.

It's kind of irrelevant from our point of view, because we have the ability to do both.

We've shown we can do casual games in our 2K Play division and we certainly know how to make AAA games.

We're prepared to do both to the extent that platform makes it available.

Your point about windowing, sort of -- windowing applies really to providing the same product on different screens at different times at different price point and windowing is a legal and appropriate way of price discriminating also.

In other words, you are able to charge a higher price for an A-plus experience and then as the experience becomes less A-plus you charge a lower price.

Therefore different consumers can consume at different points -- different price points But generally windowing refers to the same product.

One motion picture first in the cinemas, then pay television uninterrupted by commercial and then free television.

Then who knows how it's consumed.

In our instance it is different because while the brands may be the same and the themes may be similar and characters may be similar, Grand Theft Auto for a console is simply different than Grand Theft Auto for a handheld.

It just has to be.

Screen size, processing power, memory and engagement of the consumers.

So the windowing plays a different role and I think your instincts are right which is the platform that gives us the biggest economic opportunity is probably where we'll start.

But our industry has moved toward simultaneous releases.

If the releases are simultaneous, generally speaking the price points are similar.

This is stuff we have to work out.

But I think what drives us first and foremost is meeting consumers where they are, both geographically and economically, bringing our intellectual property to them, cross-platform and across economic model, with a constant unwavering focus on quality, both from a development point of view and a marketing point of view, and, look, no one is perfect.

We have our lapses.

But we're certainly moving in the right direction.

Okay.

Great.

Congratulations, it was a great quarter.

Thank you.

(Operator Instructions) We appear to have no further questions, I would like to turn the call back over to the speakers for closing comments.

Just before we do that, Eric Handler, I have the number for you in Japan it's 400K or so in Japan, and that was the highest selling western developed title on this generation.

So, speaking for all of us here today, first of all, I want to thank you for joining the call.

Secondly, this has been a hard one quarter and a hard one game, and really all the credit for the success that we're talking about today goes to all our colleagues all around the world.

It starts with phenomenal properties and amazing development and I can't stress enough how difficult that is and how much commitment and time and energy and engagement it takes to do that.

Sometimes I think for our development folks, it feels like a thankless task so we specifically want to be thankful and show our gratitude.

It's incredibly exciting to be part of this organization.

It's incredibly rewarding to see these results and thank you for joining us today.

Thank you.

This does conclude today's teleconference, you may disconnect your lines at this time.

Thank you for your participation.