Take-Two Interactive Software Inc (TTWO) 2010 Q4 法說會逐字稿

Greetings and welcome to the Take-Two Interactive Software's financial results for the 3 and 12 months ended October 31, 2010.

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

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

(Operator Instruction) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications for Take-Two Interactive.

Thank you.

Mr.

Diamond, you may begin.

Good afternoon.

I'm Hank Diamond.

I'm very excited to have recently joined Take-Two as Senior Vice President of Investor Relations and Corporate Communications.

Welcome and thank you all for joining us on our conference call to discuss Take-Two's results for the 3 and 12 months ended October 31, 2010.

As previously announced, the Company's Board of Directors has approved a fiscal year-end change from October 31, to March 31.

Future financial results will be reported in accordance with this change beginning with the three and nine months ended December 31, 2010.

Today's call will be led by Strauss Zelnick, Take-Two's Chairman; Ben Feder, our Chief Executive Officer; Karl Slatoff, our Chief Operating Officer; and Lainie Goldstein, our Chief Financial Officer.

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

Before we begin, I'm obliged to review our Safe Harbor statement.

By reminding everyone that the statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws.

These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us.

We have no obligation to update these forward-looking statements.

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

These important factors are described in our filings with the SEC including our 10-K for the fiscal year ended October 31, 2009, and our 10-Q for the three months ended July 31, 2010.

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

And now I'll turn the call over to Ben.

Thanks, Hank.

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

Nearly four years ago, I joined Take-Two as part of a management team that shared a single vision with our colleagues and shareholders, of what the Company could become.

That vision was and remains to make this the most creative, the most innovative, and the most efficient Company in the interactive entertainment industry.

From day one, we took action to transform our organization.

These actions included investment in our superb creative teams, a highly disciplined approach to building our portfolio of world-class titles, a sharpened focus on our core business and continued emphasis on efficiency throughout the Company.

Today, Take-Two stands as one of the industry's most dynamic and well-positioned leaders.

As a result of the terrific efforts of our team, I'm extremely proud to say that we have made significant strides towards achieving our objectives, mainly we created a diversified balanced portfolio across all of our publishing labels comprised of critically and commercially successful AAA titles.

We own the vast majority of our intellectual property.

We streamlined our strategy to focus on our core business of creating the highest quality interactive entertainment experiences and divested non-core assets including Jack of All Games.

We supplemented our business by selectively engaging in strategic opportunities in emerging markets, new platforms and digital distribution channels.

We implemented a targeted restructuring that drove more than $40 million of costs out of our business.

Without compromising our creative standards and competitive edge.

We enhanced our sound financial position by completing a $138 million convertible note offering during one of the most difficult economic environments in US history.

We resolved all of the legal governmental investigations that have tarnished the Company's reputation.

We optimized and achieved profitability in our sports business.

This year, we achieved our paramount goal to generate profitability in a year without a major Grand Theft Auto release.

I'm incredibly proud of the team at Take-Two and their success in transforming the Company into the profitable, diversified and growth oriented business that it is today.

Take-Two is truly a new Company.

One that is in a stronger position now than at any other time in its history.

I'd like to thank everyone throughout our organization with whom I've had the honor to work during my tenure as CEO.

Your commitment to excellence throughout this change has established the groundwork for what promises to be an even brighter future.

Now I'd like to turn the call over to Strauss.

Thanks, Ben.

I'd like to take this opportunity to thank Ben for his valued leadership which has played an integral role in transforming our business and creating a strong foundation upon which Take-Two can build in the future.

I share Ben's deep appreciation for and pride in our entire team's contribution.

We intend to maintain the same strategy and the same focus on execution going forward.

Turning to our results, we are pleased to report both revenue and earnings have significantly exceeded our prior guidance.

For the 12 months ended October 31, 2010, net revenue increased 65% to $1.16 billion.

Our non-GAAP income from continuing operations increased to $98 million or $1.06 per diluted share.

And we finished the period in a strong financial position with $251 million in cash and ample borrowing capacity on our undrawn credit facility.

In the last 12 months more than 14 new titles contributed to our revenue across all of our labels.

This achievement underscores our commitment to diversifying our portfolio, delivering more consistent and balanced revenues and most importantly, achieving profitability in a year without a new major Grand Theft Auto release.

Rockstar had phenomenal success with the launch of Red Dead Redemption which has sold-in nearly eight million units worldwide and continued catalog sales including Grand Theft Auto IV and Midnight Club - Los Angeles.

2K had its best year ever with the commercial and critical successes of BioShock 2, Mafia II, Civilization V, and NBA 2K11.

In addition, our 2K Sports division achieved profitability this year.

Driven primarily by strong sales of NBA 2K11 which has sold-in more than three million units worldwide, as well as MLB 2K10.

Our world class creative teams continue to set new benchmarks for innovation and overall excellence.

Red Dead Redemption, BioShock 2, Civilization V, and NBA 2K11 earned extraordinarily high scores and have been honored with numerous industry accolades.

Last weekend Red Dead Redemption won Game of the Year at Spike TVs 2010 VGAs.

We also took home several other key awards including--Best Team Sports Game for NBA 2K11; Best Song In a Game, for Far Away from Red Dead Redemption; Best Original Score, for Red Dead Redemption; and Best Downloadable Content, for Red Dead Redemption-Undead Nightmare.

These awards reflect our strong and diverse portfolio of intellectual property, which is now translating into profits.

Our digitally delivered offerings also contributed to our revenues and profits.

We were one of the first publishers to create downloadable content and have steadily expanded this segment of our business.

In 2010 we released many successful DLC packs for titles such as Borderlands, BioShock 2, Mafia II, and Red Dead Redemption.

Digital content remains an important opportunity for future growth and profitability and we will continue to invest in this area of our business.

Our diverse catalogue is also an excellent source of ongoing revenues.

It positions us well to maximize the value of our intelectual property as this console generation continues to extend its lifecycle.

The strength of our catalogue is reflected in the fact that we consistently sell a higher number of units per SKU than any third party publisher in the industry.

We are proud of the progress that we've made throughout this year.

Our financial performance set against a challenging economic environment, illustrates our ability to deliver increasingly diverse portfolio of AAA titles that appeals to a broad audience.

We are working to deliver consistent and predictable profitability to our shareholders.

Looking ahead, you should expect us to issue guidance for fiscal year 2012 when we announce our results for fiscal year 2011.

While it's still early, I feel very good about our outlook both for 2012 and beyond.

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

Thanks, Strauss.

I'd like to start by sharing some of our thoughts on the current landscape for the video game market.

On its face, 2010 was another challenging year for the industry.

However softness in the overall market can be largely attributed to continued weakness in specific product categories such as music and handheld games.

These trends have dampened what has otherwise been a solid year for the core hardware and software markets.

For example, sales of Xbox 360 and PS3 software are showing double-digit increases for the year.

The installed base of consoles across the board has continued to grow at reasonably healthy rates.

This dynamic challenges the seemingly growing sentiment that the core gaming market has cooled off.

Take-Two's strong performance this year shows that gamers are as willing as ever to open their wallets for truly exceptional differentiated entertainment experiences.

Our commitment to being the most creative Company in the industry has enabled Take-Two to grow its business this year by giving consumers exactly what they want, great content.

And we fully expect our upcoming releases to meet the demands of an increasingly discerning gaming community.

We are all very excited about our announced pipeline for 2011.

Which positions us well to build on our recent success by increasing the depth and breadth of our product line up.

LA Noire will be a groundbreaking new title from Rockstar when it launches this spring.

Revolutionary new technology and an entirely new game play experience will continue the Rockstar tradition of defying categorization while pushing the boundaries of the medium.

Already recognized by the Game Press as one of the strongest contenders of 2011, LA Noire will be featured on the February cover of PlayStation, the official magazine.

And will be supported by major pre-order programs with key retailers, including Wal-Mart, Best Buy, GameStop, Target, Amazon, and our international partners.

Duke Nukem Irreverence, mixed in with Overdose of Ego is the perfect antidote to politically correct gaming characters.

One of the most highly anticipated titles of 2011 Duke Nukem Forever, delivers what gamers have been waiting for, an action driven body, laugh out loud, good time.

2K Sports will broaden its offering in 2011 with the next installment of its popular simulation tennis series Top Spin 4.

In addition, we will release Major League Baseball 2K11 featuring two-time Cy Young winner, Roy Halladay of the Philadelphia Phillies.

2K Games remains hard at work on Spec Ops-The Line, XCOM, and BioShock-Infinite.

We'll have much more to share on these games in the coming months.

In addition to delivering some of the most innovative titles in the industry, Take-Two has transformed its marketing campaigns into major tent pole events.

The successful launches of Red Dead Redemption, BioShock 2, Mafia II, NBA 2K11, and Civilization V, demonstrate our ability to execute highly coordinated global marketing campaigns that leverage traditional media, online media, and the retail channel.

Rockstar, 2K and our sales teams constantly challenge themselves to find new ways to generate buzz for our products and to build communities that support our franchises before, during and after product launch.

While we're focused on our core business of creating and marketing AAA titles for consoles, we've also been actively pursuing opportunities to leverage the strength of our brands across new platforms and distribution channels.

We believe there are significant online opportunities for our franchises.

Such as evolving downloadable content modules and online multi-player experiences.

Our upcoming Civilization game for Facebook and NBA 2K online in China are just two examples of our efforts to expand into these emerging platforms and intelligently pursue activities that offer long-term benefits to our organization.

Consistent with our strategy to lead with our brand not with our capital, we pursue these opportunities with minimal risk.

This has enabled us to expand our expertise and gain exposure to new gaming paradigms without taking our eye off our core objectives.

And finally, we continue to optimize our infrastructure as part of our goal to be the most efficient Company in the business.

This year we implemented a cost reduction program that resulted in $15 million of annualized savings.

We are constantly looking for new ways to drive operational efficiency.

Thanks and I'd like to turn the call over to Lainie.

Thanks, Karl, and good afternoon, everyone.

Today I'll review our results for the 12 months and fourth quarter of our old fiscal year ended October 31, 2010.

And then provide some detail around our outlook for the new fiscal year ending March 31, 2011.

As previously announced we changed our fiscal year end to March 31, and in the next week we will be filing a transition report on Form 10-KT for the five month transition period of November 1, 2009, to March 31, 2010.

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

The discontinued operations are comprised of the Jack of All Games distribution business, which we sold in February 2010.

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

We have provided a reconciliation of our non-GAAP to GAAP results in the tables included in our press release.

This has been a milestone year for Take-Two both in terms of revenue growth and profitability.

Starting with the top line for the 12 months ended October 31, 2010, we grew our net revenue by 65% to $1.16 billion despite a challenging environment for interactive game sales growth.

Leading the year's sales were the following titles--Red Dead Redemption, BioShock 2, NBA 2K11, Mafia II, Borderlands, Episodes from Liberty City, NBA 2K10, GTA 4, MLB 2K10 and Civilization V.

In addition, we also benefited from the continued strength in sales of our catalog titles.

Which represented 23% of our total revenue.

We saw growth in our digital business achieving $94 million in revenue for the year.

Led by online versions of Borderlands, GTA 4, episodes 1 and 2, Civilization V and the Red Dead Redemption expansion packs including the recently released Undead Nightmare pack.

Our revenue split across the labels was 46% Rockstar, 31% 2K Games, 18% 2K Sports and 5% 2K Play.

Turning to profits, during the 12 months ended October 31, we achieved our goal of profitability without a new release of Grand Theft Auto.

Delivering non-GAAP income of $98 million or $1.06 per share.

And non-GAAP EBITDA of $130 million.

On a GAAP basis we generated income from continuing operations of approximately $50 million or $0.58 per share.

Our improved margins were driven primarily by our strong revenue growth, and also benefited from our successful implementation of a plan to reduce costs.

We realize $8 million of savings during the 12 month period and are on track to achieve a $15 million annualized reduction in the new fiscal year.

As previously mentioned, we also achieved profitability in our 2K business -- 2K Sports business.

This was driven by the success of our NBA franchise as well as slightly better than expected results from our Major League Baseball business.

Now I'll turn to our results for the fourth quarter.

Our fourth quarter results significantly exceeded our expectations.

With net revenue increasing 32% year-over-year to $374 million.

A number of our titles performed better than expected, including NBA 2K11, Mafia II, and Civilization V.

We also continue to see strong sales of Red Dead Redemption which remained among our top-selling titles.

In addition, GTA 4 Complete and the Red Dead Redemption-Undead Nightmare pack were added to our Q4 line up.

Our digitally delivered business was also strong this quarter.

Digital revenue was about $33.5 million up by $15 million as compared to our third quarter.

Due to strong consumer receptivity to the Red Dead Redemption-Undead Nightmare pack, Civilization V, and DLC for Borderlands.

Turning to profits, non-GAAP income from continuing operations increased to $64 million or $0.67 per share.

Up from $8 million or $0.10 per share last year.

On a GAAP basis we generated fourth quarter income from continuing operations of approximately $54 million or $0.58 per share.

Our margins increased significantly year-over-year due to our higher revenues, business mix and cost savings initiatives.

Our gross margin for the fourth quarter increased almost 8 percentage points year-over-year to 45.5%, primarily due to several key releases of internally developed titles in the current period which sold at higher price points.

Operating expenses in Q4 were approximately $103.3 million up $9.3 million mainly due to an increase in marketing expense but down as a percentage of revenue.

Selling and marketing expense rose by about $10.1 million.

This is primary due to marketing expenses for the titles launched in Q4 and increased performance based incentive compensation.

Research and development expense increased by $2.2 million mainly due to lower capitalization rates based on the timing of key releases.

These increases were partially offset by a decrease in general and administrative expense of $2.7 million.

Primarily as a result of our cost-cutting initiatives and lower IT and bad debt expenses.

Depreciation and amortization was consistent with Q4 of last year.

Interest and other increased $1.9 million.

This reflects a $2.7 million foreign exchange gain in the quarter, up from a gain of $1.2 million in Q4 last year.

Moving on to our cash flow and balance sheet, for the full-year our strong profits translated into increased cash provided by operations of $116 million.

As a result we ended Q4 with a cash balance of $251 million.

At the end of Q4 our accounts receivable balance was $165.5 million reflecting the launch of NBA 2K11 and our holiday title.

Inventory at the end of the quarter was $30.3 million up $3.6 million from this time last year primarily due to having a more robust line up of titles in our inventory going into the holiday season.

Software development costs and licenses were comparable to the prior year end and down slightly compared to the third quarter reflecting the amortization of development spend on our fourth quarter titles, partially offset by our continued development costs on future releases.

Our current estimate for our tax NOLs are approximately $280 million in the US and approximately $40 million abroad.

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

Please note that our guidance is based on our new fiscal year ended March 31, 2011.

The third quarter represents the three months ended December 31, 2010.

The fourth quarter represents the three months ended March 31, 2011.

For the 12 months ended March 31, 2011, we expect revenue to range from $1 billion to $1.1 billion and earnings per share to range from $0.50 to $0.65.

Our expected results may be affected by variability in foreign exchange rates as our guidance is based on spot rates as of the time we finalized our forecast.

Let me provide some specific data points on our fiscal 2011 outlook.

We expect a revenue breakdown from our labels to be roughly 52% from Rockstar, 21% from 2K Games, 21% from 2K Sports, and 6% from 2K Play.

We expect our geographic revenue split to be about 60% North America and 40% international.

Excluding our sports business, our geographic split is expected to be approximately 55% North America and 45% international.

We expect gross margins for fiscal 2011 to be in the low 40s which is in line with the 12 months ended October 31, 2010.

Now to our operating expenses which we will compare against our old fiscal year ended October 31, 2010, referred to as the prior 12 month period.

We see fiscal 2011 overall operating expenses remaining flat with the prior 12 month period.

Selling and marketing expense will decrease by approximately 5%.

Based on the timing of marketing required to support our titles.

However as a percentage of sales, we expect it to be in line with the prior 12 month period.

General and administrative expense is expected to increase by about 7% due to higher IT expenses, professional fees, and bad debt expense.

A lot of Two expense items are higher due to the absence of credit, which benefited the prior period.

Research and development expense is expected to increase by about 11%.

Primarily due to higher headcounts and personnel costs in the current period.

Depreciation and amortization will remain flat with the prior 12 month period.

Our fiscal 2011 guidance reflects interest and other expense of $5.8 million and tax expense of about $8 million.

And an estimated share count of approximately $99 million.

The share count includes 6 million of participating shares of our unvested restricted stock grants and 13 million of dilutive share underlying our convertible bond.

Turning to the third quarter ended December 31, 2010, we expect revenue to range from $290 million to $315 million and earnings per share to range from $0.25 to $0.35.

Let me provide some additional data points on our Q3 outlook.

The majority of our Q3 revenue is expected from our holiday releases.

Mainly NBA 2K11, Nickelodeon Fit, New Carnival Games, and Red Dead Redemption-Undead Nightmare as well as our digital offerings and catalog titles.

We expect gross margins in the low 40s for the quarter.

This reflects estimated allowances for planned price protection reductions on several titles after the holiday season as well as an increase in internal royalty expense due to our label mix.

Now for our operating expenses which we will compare against our old fourth quarter ended October 31, 2010.

Referred to as the prior quarter.

We expect overall operating expenses to decrease in Q3 as compared to the prior quarter by 6%, primarily driven by lower selling and marketing expense which will decrease by approximately 17%.

General and administrative expense is forecast to increase in Q3 by approximately 5% primarily due to increased personnel costs as well as an increase in IT expenses as a result of the relocation of one of our data centers.

Research and development expense is expected to increase by approximately 19% in Q3 as a result of lower capitalization rates being forecast during the holiday season.

Depreciation and amortization in the third quarter to remain approximately flat as compared to the prior quarter.

Based on our Q3 forecast we expect interest and other expense of $1 million.

Tax expense of $2.6 million and an estimated share count of approximately $99 million.

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

Turning to the fourth quarter ended March 31, 2011, we expect revenue to range from $100 million to $150 million and loss per share to range between $0.50 and $0.60.

The majority of our Q4 revenue is expected to come from the release of MLB 2K11, Top Spin 4 and our catalog titles.

We expect gross margins in the mid 30s for the quarter based on our mix of gains as we expect MLB 2K11 to represent a significant portion of our Q4 revenue.

We expect overall operating expenses to decrease by 15% in Q4 as compared to Q3.

Primarily driven by lower selling and marketing expense which will decrease by approximately 30% due to holiday marketing campaigns in the prior quarter.

General and administrative expenses and depreciation and amortization in Q4 should remain in line with Q3.

Research and development expense is expected to decrease by approximately 6% in Q4 compared to Q3.

As a result of higher capitalized software rates, as the rates are lower during the holiday season of Q3.

Based on our Q4 forecast we expect interest and other expense of $2.2 million, tax expense of $1.9 million, and an estimated non-dilutive share count of approximately $81 million.

I will conclude by saying that we are very pleased with our business performance during fiscal 2010.

And a significant improvement to our financial position.

Our balance sheet and cash position are strong and we feel confident that we will be able to maintain the strength with the slate of releases we have lined up for the near future.

We remain highly focused on executing on our product release schedule and continuing to operate the Company in an efficient manner.

Now, I'll turn the call back to Strauss.

Thanks, Ben, Karl, and Lainie.

We're very proud of the new Take-Two, a Company that is stronger than ever, creatively, operationally, and financially.

We're continuing to execute on our strategy of offering a select portfolio of AAA titles, expanding global distribution channels and markets for our brands against the backdrop of sound fiscal discipline.

We'll now take your questions.

Operator?

Thank you.

Ladies and gentlemen at this time we will be conducting a question-and-answer session.

(Operator Instructions) Our first questions comes from the line of Arvind Bhatia with Sterne, Agee.

Please proceed with your question.

Thank you, good afternoon.

Congratulations guys for a strong quarter.

Couple of questions, first one is on your digital revenue this quarter being strong at 33.5 I think you said Lainie.

Help us understand how we should model going forward -- is the growth rate very strong double digits?

Just give us some color of what you're expecting there.

And then on LA Noire I just want to be sure is a currently not in your fiscal 2011 guidance?

Because it says spring which I guess is on the cusp of your Q4 or Q1?

If you could just answer those two questions please.

Sure.

Thank you very much.

On digital revenue, it varies based on the downloadable content that we release title by title.

In certain instances it's made a lot of sense to have a very robust program like Borderlands and the downloadable content is doing great for Red Dead Redemption.

In other instances it may not.

So it's going to be title to title.

That said, it's going well and it looks to be gaining traction with consumers, so we do expect to have growing presence there.

The other part of digital distribution revenue is obvious in our catalog, our PC titles that we make available that way.

Essentially a way of getting shelf space after retail is no longer interesting in carrying a title and I think you can expect that to grow over time as well.

But I don't think we have a trend rate to share with you.

On the second point, yes you are correct the LA Noire is not included in the new fiscal 2011 guidance.

That's correct.

Just one last one if I could.

On digital going back to that, what kind of margins are you getting?

Can you help us understand that a little bit?

The margin on the digital business, Arvind, seem to be in line with the regular retail SKU.

It is dependent upon what the development costs are for the downloads.

And also based on the volume that we achieve and the success of the title.

Okay great thank you.

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

Please proceed with your question.

Hi Strauss, Ben, Karl, Lainie, and Hank.

Congrats on your quarter.

-- if you could just give any color on Max Payne 3 as it wasn't on your coming slate.

Then your sales and marketing going down 30% in Q4.

I'm kind of surprised in given that LA Noire is supposed to come out in the spring.

Then I have a follow up.

Yes, we're really not talking about specific titles apart from what we've got released on the schedule.

And in terms of the second question Lainie?

For selling and marketing in our new Q4, LA Noire, we just said is not in the quarter.

So there may be some marketing leading up to the titles released.

But during Q4 we don't have many key releases and it's a slower time for the overall industry coming out of the holiday season.

So that's why we expect it to come down significantly.

Okay and then you guys have always been very successful with mega game propositions, where your development expense can exceed $75 million and over an extended development timeline.

I was just curious if you could refresh us on your green light process for mega games?

Hi Mike, it's Karl.

Our process is as you know has been, we implemented it for quite some time and it hasn't really changed.

Other than to say that we are continually focused on looking at every way that we can to optimize our studio structure and to keep our costs in line.

It's a creative process, it's difficult to always predict what the development schedule is going to be.

But we are making every effort that we can to keep those cost in line as much as we can.

Okay thank you.

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

Please proceed with your question.

Good afternoon guys and great year.

Congratulations.

Couple of questions.

One housekeeping first, I haven't been through all your filings tonight but will you be providing restated June - September quarters so that we can put together a full year as you move fiscal up in the coming weeks here?

Then what are your thoughts on the 3-D handheld coming out next year from Nintendo?

And your support for Kinect, how do you expect to be supporting those platforms in the new year?

Tony, for the period that we haven't filed to date, we will, when we file the 10-K for our new fiscal year end, all of the quarters will be in those periods.

So you'll be able to really see the whole year for the first time.

And in our December 30 quarter closing, you'll be able to see the December 30 quarter comparative.

So when we do our 10-Q that gets filed in February.

And Tony, regarding I believe your question was specifically about the 3DS.

Obviously we're excited about the 3DS.

At this point we're looking at the 3DS, and we're excited about what it can bring to the consumer market.

So are looking at doing some things but we haven't announced anything at this point.

This is also true for Kinect.

And Kinect as well.

The same holds true for Kinect.

Okay.

Then just one follow up on the last question if you don't mind.

On the digital, why aren't those margins a little bit higher?

Most of your peer group is experiencing higher margins on the digital revenue streams and you guys continue to kind of talk about those margins being in line with the traditional business?

Actually, it will vary by title by title.

So we will see some titles that are on the higher end of the range.

Then we'll also have some other titles whether it's our catalog that continues to sell digitally, so those may have lower margins.

So the mix together overall is in the same margin range.

Okay.

All right thanks guys.

Great job.

Our next question comes the line of Brian Fitzgerald with UBS.

Please proceed with your question.

Thanks.

Congrats guys on the quarter.

Maybe as a follow on to Arvind then some of the digital questions, I don't want to beat a dead horse.

But have you seen any changes in the attach rates of DLC as the industry continues to go more digital?

And maybe your thoughts longer-term as we continue -- the business continues to go digital?

Where do you think catalog gets to as a percentage of the run rate business?

I think Lainie, you said it was 23% this quarter.

Thanks.

Yes.

Thanks Brian.

It's Strauss.

We don't really measure as to high rates at this point in time because it's not that just you have an installed base, obviously of the console, it's also how many subscribers you have.

So it's two levels of installed base.

We're definitely seeing more popularity and more interest.

We put out a whole lot of well-managed and well-thought-out digitally distributed content for Borderlands and the same now for Red Dead.

And we're seeing a lot of consumer interest.

But I think it's tough to measure in terms of the tie rate, it really isn't the way we look at the world.

In terms of where the catalog is going, it all depends on how long the cycle lasts.

We have found that when you put out really high quality products, it benefits your catalog.

And I think we have the highest percentage of units sold per SKU of any third party publisher and that reflect the fact that when you put out a really high-quality product, it's not only a good front line seller, but the long tail if you believe in the long tail, that too is compelling and getting more compelling.

Depending on how long the current console cycle lasts, you could have a situation where catalog is a greater and greater percentage.

Obviously to the extent that there is a shift in the hardware, that affects your catalog sales.

Although we found that we catalog from the prior generation extending well into the new generation.

So in general it's good news.

But we don't make our projections based on percentages, because our percentages could be bad and someone elses could be good if they put out good titles.

Of late, we've been putting out good titles.

We're getting good results.

Great thanks guys.

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

Please proceed with your question.

Hi.

Thanks for taking my question.

I'm just curious now as your cash balance builds, what are some of your thoughts on what would be the key uses of cash going forward?

It's a good question and obviously we see ourselves as exceedingly disciplined people.

As a team we haven't been here that long and it wasn't that long ago that we had to be concerned about our balance sheet.

We are grateful that our balance sheet is in such sound condition now.

And it's by dent of everyone's hard work and discipline.

Our strategy is to lead with our brands, not with our capital.

As we expand our business and geographies and open an office in Asia, became a first party publisher in Japan, developing our first online game in China.

All of these things are being done with very careful consideration to the cash expense and the financial risk.

When we're not expert in a space we're very happy to partner with experts as we have with Tencent in China.

What that means is that if we get something wrong we're not betting the Company were not even betting a little bit of the Company.

Were taking measured risk to grow our business.

So far it's really paying off if you take a look at how Asia's contributing to our results for example.

And how frankly optimistic we are about some of our line extensions, whether that's Civilization for Facebook or the development we've done for iPad and iPhone for our up coming basketball release in China.

So, you're right to suggest that we haven't compromised our balance sheet as we try to expand our business.

And transform the business to be focused not just on AAA console titles but also on what those AAA console titles can mean in other markets.

With an eye towards being everywhere are consumers are.

Anywhere in the world, any time of day, on any device and even with different monetization methods.

Our hope is that, that's not capital intensive exercise.

The truth is we make very deep games that can take some time to develop and can be very expensive.

And you are talking to a very disciplined team.

So we are happy to reserve our capital for that situation.

If interesting, strategic opportunities come along we also more and more have the ability to avail ourselves of them and that feels good too.

Okay, thank you.

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

Please proceed with your question.

Yes, good evening.

Thanks for taking the call.

Two questions for Strauss, then Mike.

One having just now finished off reporting the -- an excellent fiscal year, achieving a major goal.

If you did the post game debrief, what are a couple of things you think you might, and the team, might have done better on that you were disappointed in, maybe with BioShock or Mafia sales?

Is there something else that I'm missing.

And then second question along the same lines is now that you've achieved the goal and you're at the new Take-Two, what are some of the big picture goals not guidance, but big picture goals, the things you want to do with the new Take-Two that you wouldn't have been able to do before under the old Take-Two?

Thanks.

Thanks, Dan.

I hope you're feeling better because you sound little under the weather.

In terms of any disappointments, quite to the contrary.

We are thrilled with the year.

Not just thrilled with the year, remember it's easy for us to sit around a conference table and talk about what the great results are and to be so proud of them.

That came about by the hard work of better -- more than 2,000 people who spent the whole year totally committed to working hard to deliver these results.

And some of what they do, much of what they do is exceedingly challenging.

Starting with the extraordinary work done by our creative teams.

That leads to the incredibly creative diverse work done by our marketing teams.

That then leads to the committed efforts of marketing and distribution people all over the world.

And then finally, the team here in, largely in New York, who's responsible for putting it all together and making sure that it make sense and delivering that information to you and putting money in our balance sheet.

It's a complex array of activities and I'm extraordinarily proud of what a terrific job the team did.

All that said, we can always do better.

We are a team that asks ourselves, how can we do better?

How can we do better?

We have a stated strategy to be the most efficient, the most innovative and the most creative Company in the business.

Candidly, I think we are the most creative Company in the business and our results reflect it.

I think we are getting to be among the most efficient Companies in the business.

I think there's always more wood to chop and no one would disagree with that.

Although we sure have made a lot of progress.

And I'm exceedingly proud of the innovation of the team and I'm particularly proud, because we don't innovate by rolling the dice with the shareholders chips on the table.

We innovate with our brands and our creativity.

We work with partners, if we don't know something and we know we don't know something we ask questions and we work with solid partners.

We take very, very measured risk.

And yet as innovative as I think we are, we do need to do more there as well as and we are committed to doing so.

I think one of the things you can look to this team to deliver is more and more innovations in terms of the creativity of what we do, continuing to experiment with line extensions and downloadable content, continue to bring our products to new platforms, and continuing to experiment with new business models.

We can do all of that better, but disappointed absolutely not.

We are thrilled.

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

Please proceed with your question.

Thanks.

Yes another debrief question.

If I go back to your original guidance for the fiscal year, you guys basically did $1.50 in upside versus where you originally expected come in.

If you were to try to attribute that to between Red Dead, NBA 2K, and everything else were you think that upside breaks down?

The upside is coming from all throughout all the labels and throughout the entire Company.

So if you look at it, big picture, from some of the bigger products that we put out this year.

Red Dead Redemption certainly was a big driver.

For the over achievement as well as our NBA titles this year.

Our catalog over delivered, our digital business over delivered.

We had some other games that came out that may have been a bit lower than expected, but were very profitable for us.

We had cost cutting and cost savings that we had put through this year when we started the year out we were driven to be as efficient as possible.

So I think it's really -- it's everything that works in the right way for us this year, Doug.

We had a couple titles that either moved out of the year, but we still were able to achieve it based on the performance of our titles and our label.

Okay, thank you.

Our next question comes from the line of Jay Leopold with Legg Mason.

Please proceed with your question.

Hi, I had a question on LA Noire.

You said it was going to be groundbreaking and unique.

I was wondering if you could describe specifically the types of things that will be different relative to other games you put out or other games on the market?

Then I have one follow.

Yes, there's a new technology employed in LA Noire that will really surprise people in terms of facial recognition, in terms of the way that the human beings are portrayed in the game, the level of realism.

But I think it's inappropriate for us to steal the marketing thunder from Rockstar Games, they have a lot to talk about and they'll talk about it in the normal course.

It's extraordinary.

The follow up question is on Kinect.

I was wondering how you are going to be approaching -- addressing that market with your existing brands?

Will you be doing it only as new games are coming out?

Or are you going to be able to go backwards and some of your existing titles make some tweaks to make it applicable to Kinect?

Jay, this is Karl.

I don't think we really think about it as going back in time and trying to make tweaks to titles that exist, in terms of Kinect or any of the new peripherals that are coming out.

It's really more about sitting down and understanding what does Kinect and these other very interesting new developments, what do they bring to the table and how can they actually add value to the experience that we've got?

So it doesn't make a lot of sense for us to just go back and try to retrofit.

We really think more on a prospective basis than on -- than looking back in time.

So we are excited about it.

We think there are certainly applications for some of our franchise.

But it's not necessarily just going back and tweaking what's going on.

I don't think that's a recipe for great success.

So how quickly can you address this new technology?

Is it going to be several years from now before the first product is able to be played on Kinect?

Or have you been working on for some time?

We really haven't discussed what our development plans are for Kinect at this point so I'm not really comfortable talking about timing.

But rest assured we are looking at a very hard.

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

Please proceed with your question.

Edward Williams your line is live.

Good evening and congrats on a great year.

Strauss, can you give us an update on the relationship with Tencent and the NBA game?

When we might see something coming out of that relationship?

The relationship is excellent.

They are the premier company in China, extraordinarily successful.

From our point of view, they are superb people to work with and we are thrilled with the relationship and things are progressing nicely.

Beyond that we don't have anything to announce at this time.

Okay, and then as you are looking at the capacity of the Rockstar and 2K Studios who are releasing major games a year.

What are your thoughts on what that capacity is at this stage?

I think what you're seeing is what you're getting.

It's a limited number of high-quality releases in a year.

And it works.

And I don't think -- I think you may see more SKUs but you are unlikely to see more titles.

The win here is not in trying to create more and more and more new IP in a given year, this pace feels pretty good.

The win is to make a whole lot more money on the titles that we put out and how do we do that?

We do that by extending the lifecycle through downloadable content, extending the catalog digitally.

Extending our reach around the world, publishing in Asia and beginning to think about how those core brands that we own and control can be meaningful to customers in all these new distribution platforms.

And then becoming expert in those platforms and getting more and more aggressive in those platforms.

I want to make sure that we don't confuse appropriate judicious risk management with a lack of interesting growth.

We are very focused on growth and we certainly have the ability to be focused on growth now and that's where we are attending.

Okay.

Great, thank you very much.

Our next question comes line of Justin Post with Bank of America.

Please proceed with your question.

Hi, this is Ryan G, calling on behalf of Justin Post.

Thanks for taking our question.

I guess the first question is going to be really on the Rockstar contract and maybe you guys can just give us an update on when that contract expires, if January 2012 is still the end date there?

And maybe talk about how its expiration really impacts if at all, the titles that are in development for the Rockstar Studios there?

Yes, Ryan we've already disclosed that the agreement with three principles of the Rockstar Studio currently expires in January 2012.

We don't use this or any other opportunities to talk about people's employment arrangements with the Company.

Those are obviously between us and the individuals.

I will say that we have the highest regarding for those three individuals.

We have the highest regard for the other 900 people that work at Rockstar.

We have the highest regarding for the more than 2,000 people who work at Take-Two.

I will tell you that we endeavor to be, it doesn't mean we are, we endeavor to be the premier home for creative talent in this business.

And we certainly try hard to be.

And we do that, we think by offering a combination of sensitivity to passion and talent, the desire to do the very best creative work against the backdrop of a very disciplined and rational business organization.

And I think that's a very best that we can do.

Okay, great.

And then looking to NBA 2K this quarter, three million units looked really good, how does that really compare to last year?

I don't know if you guys have disclosed that number?

And then if at all, do you think that title really benefited from not having much competition this year?

Well in comparison for NBA 2K11 versus 2K10 when we have gotten through the Christmas season and reported numbers in March for our January quarter, we were at that point, we had announced that we had -- were over two million units.

So compared to the three million that we're at right now, we are far exceeding and far ahead of our previous version.

We also later on last year had announced that we have gotten to over three million units, but that wasn't until, I think about the July quarter.

That was announced in early September.

And in terms of the competitive landscape.

Look, last year's release had something like 75% market share, this year's release was the highest rated sports title of the console generation.

And I think the team of visual concepts in 2K did just a superb job with the game.

The cover athlete is Michael Jordan.

How could you not want that game?

And the marketing was phenomenal.

Everything was really lined up.

I think the nature of the sports business is once you achieve a commanding market share, it begins to be yours to mess up.

And not only did we not mess up, the teams just did a phenomenal job.

We are so grateful to the team and we are grateful that consumers were delighted by the game.

We are certainly delighted by the results.

Okay, great.

Thank you.

Our next question comes line of James Hardiman with Longbow Research.

Please proceed with your question.

Thanks for taking my call and congrats on a great quarter.

My first question -- I know you don't typically get in the habit of breaking out sort of month-to-month within the quarter.

But obviously, given the special circumstances in which October was both the prior quarter and the upcoming quarter, can you give us just an idea of sort of what October represented for you guys in the October quarter?

And ultimately, when I think about your $0.25 to $0.35 guidance for the December quarter, some of that's already happened.

Do you expect sort of November - December to be profitable?

How should I think about that?

We don't give out our guidance on a monthly basis as you said.

So I really can't share that level of detail with you.

But, we are looking at our new period as our new Q3 and our new Q4 going forward.

So we're shifting to our new fiscal year and that's how we are going to be giving out information, because it will be much easier when we report those numbers.

You'll have comparisons to compare it to.

Well I guess I'll ask it another way.

Hopefully we'll get some more disclosure on this when you put out the comparisons next week.

But the November - December period which is the only piece that we haven't already seen yet, do you expect that to be up versus last year?

How should I think about the holiday season for you guys?

Well you haven't seen the August and September yet and that will get filed with our 10-Q in the December 31, 2010.

So those are the two months that haven't been filed.

And then we'll do the October, November, December quarter when we announce the full quarter which will be in early February.

So in terms of where the business is going.

We tried to give as much detail as we could on Q3 and Q4 in my prepared remarks.

And really -- when we've looked at the holidays and October titles and how they are shipping into the market.

We feel like the quarter is going very, very well for us for Q3.

And Q4 as I mentioned, has not -- does not have many key releases in the quarter.

And we said that we had MLB in that quarter.

Okay, fair enough.

And then just a quick follow-up.

From a pricing perspective, it sounds like for the December quarter the biggest game sounds like it still NBA 2K and it seems like that pricing is holding in pretty well.

What are your thoughts just generally as we round this final turn into the holidays pricing this year versus last year?

Is it pretty positive from what you can tell?

Yes we are feeling pretty good about the holidays.

We are right in it.

We're still selling.

So there's still more to come.

We are very comfortable where we are right now.

We're certainly meeting our expectations.

Pricing is holding up.

Obviously we are participating in promotions as is normal for the holiday period but we do feel good about where we are and pricing is holding.

So we're happy.

Great, thanks guys.

Thank you very much.

That was our last question.

I just like to take a moment first of all to express gratitude once again to Ben.

To express gratitude on behalf of our management team, to all of our colleagues all over the world.

Who have done an incredible job this year and are very charged up and excited about what lies ahead.

As are we.

We are feeling optimistic, and energized, and enthusiastic.

We very much appreciate your support.

All of us would like to issue a very happy holidays and we will talk to you in the new year.

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.