Take-Two Interactive Software Inc (TTWO) 2011 Q3 法說會逐字稿

Greetings and welcome to Take-Two Interactive Software's fiscal third quarter 2011 results.

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

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

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

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

Thank you, you may begin.

Good afternoon.

Welcome and thank you for joining Take-Two's conference call to discuss its results for the third quarter of fiscal 2011 ended December 31, 2010.

As previously announced, the Company has changed its fiscal year end from October 31 to March 31, and all results are now reported in accordance with this change.

Today's call will be led by Strauss Zelnick, Take-Two's Chairman and 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 those in the forward-looking statements based on a variety of factors.

These important factors are described in our filings with the SEC, including the Company's transition report on form 10-KT for the five month transition period ended March 31, 2010.

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

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

Thanks Hank.

Good afternoon, and thank you for joining us.

I'm pleased to report that Take-Two has once again delivered better-than-expected revenue and earnings.

In fact, this is the fifth consecutive quarter in which we have exceeded our guidance.

These results reflect the success of our team's efforts to build an industry-leading, diversified portfolio of critically acclaimed AAA titles, convert that intellectual property into revenue through innovative marketing and delivery, and increase profits by improving operational efficiency.We've truly built a new Take-Two; one that's better positioned than ever to deliver tremendous value to our customers and shareholders alike over the long term.

I'll briefly review our results for the third quarter and year to date, then I'll highlight some of our team's recent accomplishments, and our optimism for continued success in fiscal 2012 and beyond.

Net revenue for the third quarter was $334.3 million, and non-GAAP earnings per share of $0.52.

For the first nine months of the year, net revenue increased 80% to $954.6 million, and non-GAAP earnings per share increased to $1.15.

As a result of our better-than-expected third-quarter earnings, which converted into solid cash flow, we ended the period in an even stronger financial position with $297 million in cash and ample borrowing capacity on our undrawn credit facility.

Our third-quarter results were driven by strong holiday sales of new titles, catalog titles, and downloadable content.

The biggest contributors were our new launches; NBA 2K11, and Red Dead Redemption, Undead Nightmare, which is offered both as a stand-alone disk and a downloadable content pack, as well as continuing sales of Red Dead Redemption.

NBA 2K11 is now sold in nearly 4 million units since launching in early October, and has become the best selling title in the history of both our basketball franchise and 2K Sports.

The titles received numerous industry honors, including more than 20 Sports Game of the Year awards, and it was heralded Sports Game of the Decade by IGN.I'd like to congratulate both 2K Sports and Visual Concepts for achieving this significant milestone.

Red Dead Redemption is now sold in more than 8 million units since its release last May.

The title has received over 150 Game of the Year awards worldwide including those from the 2010 Spike Video Game Awards, Game Informer, GameSpot, Official Xbox Magazine, USA Today, Entertainment Weekly, Spin, and Associated Press to name a few.

Congratulations to the team at Rockstar for the tremendous success of this franchise.

Red Dead Redemption; Undead Nightmare builds upon the front line title's blockbuster success.

It's a perfect example of how we use additional content to keep consumers engaged with our titles for longer periods of time, thereby extending the life of the title, increasing the value of the brand, and ultimately converting it into a franchise.

We'll continue to capitalize on new and emerging opportunities to maximize the value of our front line releases, and leverage the strength of our brands.

Aside from NBA 2K11 and the Red Dead Redemption franchise, our third-quarter results benefited from strong holiday sales of titles including Grand Theft Auto 4 Complete, Borderlands Game of the Year, Civilization 5, and catalog offerings of the Grand Theft Auto franchise.As a result of our exceptional third-quarter performance and positive outlook for the remainder of the fiscal year, we've increased our guidance for the fourth quarter and the fiscal year ending March 31, 2011.

Lainie will provide more detail later in the call, but I wanted to highlight that we now expect to delivery non-GAAP earnings per share of $0.80 to $0.85.

Our results this year clearly demonstrate the success of our initiatives to diversify our portfolio, deliver more balanced revenues, and achieve consistent profitability, even in years without a major new release of Grand Theft Auto.

Looking ahead to the balance of the year and fiscal 2012, I've never been more enthusiastic about our diverse lineup of offerings.

From unique, ground-breaking new titles such as L.A.

Noire, to the long anticipated return of Duke Nukem, the interactive entertainment industry's most irreverent hero, will continue to deliver the highest quality entertainment experiences that set new standards for creative excellence and innovation.

Over the long term, we'll continue to build on the success of our AAA franchises.

We'll also lead with our brands to pursue opportunities in areas such as digitally delivered content, online and social gaming, and fast-growing emerging markets.

Our vision has always been to make Take-Two the most creative, the most innovative, and the most efficient company in the interactive entertainment industry.

I'm extremely proud of the progress our entire organization has made towards achieving that goal.

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

Thanks Strauss.

Fiscal 2011 has been a great year for Take-Two, both in terms of creativity and profitability.

We've assembled a diverse collection of hit franchises with the size and scale to deliver profits without dependence on any single title.

In fact, 14 new titles have contributed to our revenue this year as did a significant number of titles from our large and productive catalog portfolio.

Take-Two's commitment to quality has enabled us to outpace the industry by delighting consumers with unique and thrilling entertainment experiences.

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

We have two great sports titles launching in the fourth quarter of fiscal 2011, rounding out what we fully expect to be -- will be a profitable year for 2K Sports label.On March 8, 2011, gamers will experience the next iteration of our popular simulation baseball franchise, MLB 2K11, which features Phillies pitcher, Roy Halladay, on the cover.

Once again, we're supporting the launch with a competition awarding $1 million to the first person who pitches a perfect game during the contest period.

We believe this was a meaningful contributor to the success of MLB 2K10, and we're already seeing higher pre-orders versus last year's launch.

In addition, this year's title will be supported by a hilarious series of short films featuring several prominent players.

On March 15, we'll launch Top Spin 4, which will feature completely revamped controls and amazing online game play, and what promises to be the most realistic tennis simulation game yet.

The game's roster has the most extensive lineup of tennis stars ever, with 25 of the sport's top athletes and legendary pros including cover athletes Rafael Nadal, Serena Williams, and Andre Agassi.We believe Top Spin 4 has the potential to be our most successful tennis game to date, and the standard bearer for this genre.

Looking ahead to fiscal 2012, we're extremely optimistic about our announced pipeline of upcoming launches which positions us well to build on this year's success.

In April, 2K Play will launch Carnival Games; Monkey See, Monkey Do, which is our first title built from the ground up to take full advantage of the innovative Kinect technology for Xbox 360.

This fun-filled whimsical game will appeal to gamers of all ages and is expected to build on the tremendous success of our Carnival Game franchise, which has sold over 7 million units worldwide.

In May, Take-Two will release two of this year's most anticipated titles.

On May 3, gamers will see the triumphant return of Duke Nukem.Published by 2K Games, Duke Nukem Forever brings back one of the biggest and most recognizable brands in gaming.Uber macho, and always politically incorrect, Duke Nukem's quest to save earth from invading alien hordes delivers what gamers have been waiting for; an action-driven, bawdy, laugh-out-loud good time.

On May 17, Rockstar games will launch its ground-breaking new title, L.A.

Noire.

Set amid the violence and corruption of post-World War II Los Angeles, L.A.

Noire is a crime thriller that defies genre conventions by blending action and real detective work to deliver a unique and captivating entertainment experience.

It features revolutionary new interrogation-based gameplay, in which players must interpret character's emotions in their pursuit of truth and justice.

Recognized by the Game Press as one of the most exciting new titles of this year, L.A.

Noire is featured on the February cover of PlayStation Magazine -- and of PlayStation, the official magazine, and is being supported by major pre-order programs with key retailers, including Wal-Mart, Best Buy, GameStop, Target, Amazon, and our international partners.

In addition to these titles, we're hard at work on the remainder of our fiscal year 2012 lineup.

Titles announced to date include XCOM, an action thriller set in mid-20th century America, Spec Ops; The Line, which promises to push the military genre to new limits with its intense experience; and The Darkness 2, which will breathe new life into the first-person shooter genre with its quad-wielding combat, ruthless story, and graphic noir art style.

In addition, Irrational Games continues to work on BioShock Infinite, which has been hailed by IGN as Game of Show for Games Com 2010 and is slated for release during calendar 2012.

Many of these upcoming titles will be on display during PAX East in Boston where gamers will have the opportunity to see and experience these titles in person.

Each of these titles is unique and has the potential to become a major hit for Take-Two.

Given our diverse and balanced lineup of AAA titles that appeal to a broad range of audiences, you can see why we're so excited about our prospects for continued success in fiscal 2012 and beyond.

In concert with our core business of producing AAA titles for consoles, we're actively pursuing opportunities with evolving downloadable content models, and online multi-player experiences, as well as pursuing regional opportunities in Asia and Latin America.

Our strategy -- our strategy for growth in these areas continues to be driven by a philosophy of maximizing revenue while minimizing risk, which we plan to execute, first and foremost, by leading with our brands.

And finally, we are constantly looking for ways to optimize our operations in pursuit of our goal to be the most efficient Company in our business.

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

Thanks Karl, and good afternoon everyone.

Today I'll review our results for the third quarter of fiscal 2011, and then discuss our increased guidance for the remainder of the year.

All of the numbers I'll be providing will be the result from the continued (inaudible), the discontinued operations amidst the Jack of All Games distribution business, which we sold in February 2010.

In addition, all 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.

Starting with the top line, our net revenue for the quarter was $334.3 million which exceeded the high end of our guidance.

As expected, revenue was lower year-over-year primarily due to last year's third quarter benefiting from a greater number of new releases, including Borderlands, Grand Theft Auto Episodes from Liberty City, and Grand Theft Auto 4 The Ballad of Gay Tony.

For the first nine months of the fiscal year, however, net revenue was up 80% year-over-year, primarily due to the outstanding performance of Red Dead Redemption and NBA 2K11.

The up-side to our third-quarter revenue per our guidance, was driven by stronger than expected sell-through of our holiday titles, which enabled us to maintain higher prices longer than we had forecast.

The largest contributors to our revenue in the third quarter were NBA 2K11, Red Dead Redemption, Red Dead Redemption; Undead Nightmare, Grand Theft Auto 4 Complete, Borderlands Game of the Year, and Sid Meier's Civilization 5.

Our solid lineup of catalog and digital offerings also contributed to revenue during the quarter.

Catalog sales represented 15% of our net revenue and was led by several titles from our Grand Theft Auto franchise.

Our digital business generated $30.8 million in revenue, led by offerings from Red Dead Redemption, Borderlands, and Sid Meier's Civilization 5.

For the first nine months of the fiscal year, digital accounted for $75 million of net revenue.

Turning to profits, during the third quarter we achieved non-GAAP income from continuing operations of $49.5 million, or $0.52 per share, and non-GAAP EBITDA of $58.2 million.On a GAAP basis we generated income from continuing operations of approximately $40.8 million, or $0.45 per share.

Our earnings exceeded the high end of our guidance primarily due to our better-than-expected performance during the holiday season.

In addition, operating expenses were approximately $5 million lower than expected as a result of the timing of marketing campaigns and lower personnel costs.

Moving on to our cash flow and balance sheet.Our strong profits during the quarter converted into solid cash flow.

As a result we ended the third quarter with a cash balance of $297.1 million.

At the end of the third quarter, our accounts receivable balance was $83.8 million.

Inventory at the end of the quarter was $28.6 million reflecting the higher stock levels for the holiday season.

Software development costs and licenses were $248.7 million.Our estimate -- our current estimate for NOL is approximately $280 million in the US, and approximately $40 million abroad.

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

We are raising our fiscal 2011 guidance based on our third-quarter actual results and our fourth-quarter forecast.

We now expect fiscal 2011 revenue to range from $1.08 billion to $1.1 billion, and non-GAAP earnings per share to range from $0.80 to $0.85, up from our prior outlook of $0.50 to $0.65.We're estimating a share count of approximately 100 million for the year.

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

For the full fiscal year, we expect the revenue breakdown from our labels to be roughly 52% from Rockstar, 23% from 2K Sports, 20% from 2K Games, and 5% 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 53% North America and 47% International.

Moving on to the fourth quarter, we now expect revenue of $130 million to $150 million versus our prior guidance of $100 million to $150 million.

We expect the non-GAAP loss per share of $0.40 to $0.45, an improvement from our prior guidance of a non-GAAP loss per share of $0.50 to $0.60.

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.

The majority of our fourth-quarter revenue is expected to come from continued sales of NBA 2K11, Red Dead Redemption, Red Dead Redemption; Undead Nightmare, and the upcoming releases of MLB 2K11 and Top Spin 4.

We expect gross margins to decrease to the mid-30s for the quarter based on our product mix, as we expect MLB 2K11 to represent a significant portion of our fourth quarter revenue.

We expect overall operating expenses to decrease by approximately 15% in the fourth quarter as compared to the third quarter.

This is primarily driven by lower selling and marketing expenses, expected to decrease by 30% as compared to the higher-volume spend during the third-quarter holiday season.

General administrative expenses are expected to increase by 5% as compared to the third quarter, primarily due to an increase in professional fees and IT expenses as we complete the relocation of one of our data centers.

Research and development expense is expected to decrease by approximately 10% in the fourth quarter compared to the third, as a result of higher capitalized software rates as the rates seasonally increase versus the holiday season of the third quarter.

Depreciation and amortization in the fourth quarter should be in line with the third quarter.

Based on our fourth-quarter forecast we expect interest and other expense of approximately $2 million, tax expense of approximately $3.5 million, and an estimated non-dilutive share count of approximately 81 million.

In summary, we are very pleased with our results during the third quarter and year to date.

Given our strong slate of upcoming releases, industry-leading creative talent and intellectual property, and laser-focus on operational efficiency, we are highly optimistic for continued success for the balance of this fiscal year, next fiscal year, and over the long term.

Now I'll turn the call back to Strauss.

Thanks Karl and Lainie.

We're proud that the new Take-Two is a Company that's executing creatively, operationally, and financially.

We'll continue to work to deliver consistent and predictable results that are driven by the most compelling and commercially successful interactive entertainment experiences in our industry today.

We'll now be happy to take your questions.

Operator?

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions) Our first question is from Arvind Bhatia with Sterne Agee.

Please go ahead with your question.

Thank you, and congratulations on your continued success.

Couple of questions.

First one is just on the fourth-quarter guidance, the increase there, is it mainly catalog or did you also increase expectations for your MLB or Top Spin titles?

And then my second question is, is there any update on Max Payne at this point?

Arvind, it's Lainie.

For the fourth quarter, the increase is coming from both our catalog and our new, new launches; MLB 2K11 as well as Top Spin 4.

We've increased our expectations for those titles versus last, last time we gave the guidance.

And in terms of Max Payne, there's no update on that title at this time.

And then one last one -- quick one.

On Red Dead Redemption, could you help us understand the frequency of the title going forward?

The last one took, what, three years, four years plus.

Is there some kind of timeframe you can put behind the next one?

You know, we've -- Arvind, appreciate it.

We have a philosophy of announcing our titles when it's appropriate for marketing them among other things.

We like to give appropriate visibility.

At the same time, consumers pay attention to those announcements, so we do try to announce within a marketing clock.

And we don't have anything to, to say about Red Dead, apart from the fact that the downloadable content for Red Dead; Undead Nightmare keeps selling, the stand-alone discs keep selling, the franchise is alive and kicking -- well, if you can say that about zombies.

And we're incredibly grateful for the Rockstar team for, for what they've delivered here.I have to say, since you opened the door to it, it really is -- it's an extraordinary creative shop that can, can take this resonant heartfelt emotional experience of Red Dead, and then also be willing to do what they did with Undead Nightmare, which is obviously a bit tongue-in-cheek, and delight consumers, surprise consumers, and throw consumers.

And that's Rockstar's stock and trade, and the industry aspires to live up to that and we're awful proud of the work that they do.

So, no, we have nothing to say about, about any future iteration except that we're grateful that this company has been able to deliver another franchise and delight consumers.

Thank you.

Your next question is from Brian Fitzgerald with UBS.

Please go ahead with your question.

Yes.

Hello.

This is Tim O'Shea speaking for Brian Fitzgerald.Congrats on the quarter.

I have two quick questions.

First, can you give us an idea of the titles that will be available on DLC during the March quarter?

Thanks.

There's nothing that's been announced to date.

And then secondly, can you give us an idea of the level of support we should expect for, for the new handheld devices; the Nintendo 3DS, and Sony NGP, or the new PSP?

And, I guess, could we expect to see additional titles added to the product release schedule there?

Thanks.

What was it, just so I understand -- what was the second part of the question?

I got the first part, what was the second part about additional titles?

Sorry, so with respect to handheld support for the 3DS and the new Sony PlayStation, can we expect to see additional titles added to the product release schedule?

Okay, so I think it's pretty much -- I think it's -- unless I'm hearing it wrong, it's the same question.

We have -- right now we have not answered, we have not announced any support for 3DS or for the new Sony handheld as well.We think they're both very interesting opportunities and obviously we'd give those things a very hard look.

Very interesting technology, very compelling technology on both sides of, of both sides.But at this point we don't have any announcements related to that content.

You know, we've, we've said all along that we find the new hardware pretty exciting and we recently announced the title for Kinect which we're incredibly excited about; Carnival Games; Monkey See, Monkey Do.We tend to -- we tend not to say what we're going to do until we're ready to do it.

Yes, and one thing that we do when we look at these kinds of things as we've said before on these calls, is we don't just release titles for the sake of releasing titles on new hardware.

We look at what, what's, what's very interesting and capable about the platforms, and we try to develop our games specifically to maximize the value of each, that each platform brings to the table.

Great, thanks.

The next question is from Mike Hickey with Janco Partners.

Please go ahead with your question.

Hello, great quarter.

Thank you for taking my questions.

First one, Strauss, obviously, you're very enthusiastic on your upcoming fiscal 2012 year.

As we try to model that potential growth, do we have -- have you announced all the games?

Or should we leave some placeholders for unannounced games?

Thanks Mike.

You know, it's a hard question to answer.

We've announced the games that we're prepared to announce now.

And I don't believe we've ever typically announced that we're not going to announce something in the future.

So, as other things come up, we'll announce them.

Okay.

And then I see you've accumulated a fair cash position here, Strauss.

Just curious, your thoughts on your current game capacity?

How you expect to manage that moving forward?

And then what else you might do with the cash?

I think you can continue to expect the type of release schedule that we've, we've aspired to have, which is to say a limited number of the highest quality releases for a diverse audience.

So Rockstar typically, but not always putting out mature themes, rated titles that are the absolute best in the business and a very limited number.

And then when they do put them out and deliver hits, having plenty of downloadable content, add-ons and other iterations and experimenting with other platforms including iPhone and iPad and others.

2K putting out typically a few more titles than Rockstar, also AAA console titles with downloadable content line extensions.

2K Play putting out titles for the family can be a greater number of SKU's.

And of course, 2K Sports putting out the franchises you know about.

I think that's pretty much the character of the Company, with one caveat, which is we're leading with our brands to develop new channels, new platforms, and new geographies.

And that means, you know, we're working on a basketball MMO for China, and some other, other really interesting activities are going on here.

And you absolutely can and should expect us to be experimenting, we hope thoughtfully, we hope judiciously, with Facebook platform, with other social platforms, and certainly we're very excited about tablets and we're very excited about cloud gaming, online and other services.

So, the Company is driven by its brand.

We're driven by owned intellectual property and we're motivated by, and engaged by, the highest quality entertainment content in the business.

But beyond that, bigger, broader, certainly is better.

Okay and the last question -- thank you for that answer, by the way.

On Duke Nukem, obviously this has been a game in development for 10 years, not by Gear but the 3G rom, 10.And have you guys been able to be opportunistic in chasing down pre-orders on the game that maybe were done three years or four years ago?

Or can you give us any sense of how we should shape the size of this offering?

Thanks, Mike.

It's Karl.

We're not announcing our pre-orders.

But suffice it to say Duke is generating a lot of buzz at this point.

We just had an event in Las Vegas, which was a very interesting kick-off event for the product.

Very well received.

So we're very excited about where Duke is from the buzz perspective right now.But we have nothing to say about specific pre-order quantities.

Okay.

Thanks, guys.

Our next question is from Eric Handler with MKM Partners.

Please go ahead with your question.

Yes, two questions.

Thanks for taking my questions.

On the downloadable content of the Red Dead; Undead Nightmare, what percent was sold as a stand-alone disk versus what was done digitally?

And then secondly, with regard to Major League Baseball.

Last year when you gave your guidance, you talked about baseball being a loss, an overhang of about $0.30 of EPS.

Given that you're seeing some improved pre-sales, do you still expect baseball to be that much of a loss this year?

Yes, thanks for your questions.

We actually don't announce the split between downloadable content and stand-alone disk sales.

However, both are performing extraordinarily well and we're gratified by it.

And as a strategic and tactical matter, I think it, it speaks well of the organization that Rockstar came out with, came out with this from a digital distribution point of view, and did a stand-alone disk, and marketed it, and is selling it so extensively.

Clearly, we are giving customers what they want.

And if they want it digitally, it's there.

If they want it on a disk, it's there.

And it's performing extraordinarily well.

In terms of MLB we do see that we -- we do anticipate the loss narrowing a bit.

Okay.

Thank you.

Next question is from James Hardiman with Longbow Research.

Please go ahead.

Hello, thanks for taking my call, and congrats on another great quarter.

Obviously, you don't really get into specifics surrounding development budgets, but can you talk just generally in terms of L.A.

Noire and compare to Red Dead as sort of an order of magnitude?

And also, to the extent that you can, talk about any assumptions that you're using in terms of the timing of lifetime revenues and how we should think about how we're going to distribute those costs once you roll that, roll that game out?

Yes, I -- on the first, we really don't talk about budgets and I wouldn't want to make a comparison.

Among other things, I don't, I don't think it would tell anyone very much.

At the end of the day, we are developing to make hip products.

We're awful proud of our track record.

And these are significant expenditures, and our capitalized software reflects that in our numbers, which has been pretty stable actually.

In terms of the timing of our amortization, we do that in accordance with GAAP like every other interactive entertainment company, with the exception of one.

Okay.

But the assumption is sort of in line with say, Red Dead, in terms of percentage of revenues you assume are going to take place in that first quarter versus, say, Grand Theft Auto?

That's a -- that's, yes, we, we're not really tracking it that way.

And again, we'll amortize it in accordance with GAAP when the time comes.

We'll see how it rolls out.

But generally speaking, the curves, the, the sell-through rate on most of these titles look pretty similar to each other.

Great.

And then just, just real quick on NBA 2K.

Obviously, it might be a little bit early to start thinking about next year's iteration.

But do you have any thoughts just generally about next year?

It's been a huge driver for you this year.

Obviously, there's going to be more competition next year.

But it also looks like you've grown the overall size of that NBA market for video games.

I don't know if that's just a function of having Michael Jordan involved.

But what are your thoughts as you look towards NBA 2K12?

It is really tempting to engage in hubris at a situation where you're dominating the market with a title that won 20 Game of the Year Awards and IGN's Game of the Decade award.

And I have to take a moment to congratulate, again, the folks of Visual Concepts and 2K Sports for doing such a fabulous job making this title, and marketing it.

And delighting consumers with it.

It's an incredible title.

It's really -- and the ratings were -- scores are incredible.

The team just did a phenomenal job.

But it's not our nature to sort of, you know, to swagger.

It really isn't.

I mean it's -- there's a difference between acknowledging great success and becoming convinced that it's owed to you.

We don't claim success.

We earn it every day.

Our team earns it every day.

And it's frankly easy for me to sit here in New York and talk about it, but it's really, really hard for the teams to create it.

So, what can I tell you about next year's game?

I can tell you that our team in Northern California every year wants to do a better job.

I can tell you that right now they're thinking about how next year's game has to be better than this year's game.

How they take our competition very, very seriously indeed, and how we don't think anything is owed to it.

We've got to go work for it and earn it every single day.

Great.

Thanks, guys.

The next question is from Justin Post with Merrill Lynch.

Please go ahead with your question.

This is Ryan Gee calling for Justin Post.

I guess the first question is going to be on your relationship with Rockstar and whether or not you guys see an opportunity to increase title production out of that studio?It looks like they have a track record of maybe one title per year.

Sometimes, maybe two.

Is that opportunity there?

And then it looks like the internal royalties were about, I think it was $105 million for the first nine months.

Does that just primarily relate to Red Dead?

Or are there other titles that it goes into that number?

And the last question is, when you look at Red Dead and Duke Nukem coming out in the June quarter, and when you think about comps for Red Dead, do those two titles, do they have the potential to really comp against a Red Dead, two titles, versus one title in that quarter?

Thank you.

Thanks, Justin.

On the first point, remember, Rockstar is a part of Take-Two.

So the relationship with Rockstar is like asking what's the relationship with your family.

We're all in this together.

And the Rockstar team is part of the Take-Two team and we're thrilled that they are.And I couldn't be, I couldn't be more pleased to be in business with anyone.

They do a phenomenal job, and that speaks for itself.

I don't need to say it, but I certainly want to acknowledge it.

In terms of increasing title production.

I think Rockstar has proven that working on a limited number of the very best titles in the business is the best way to create ground-breaking entertainment experiences that create hits, that create profits.

And then what's, what's exciting is it, it's not, it's obviously not limited to a release and then you're done with it.

Because we have a huge release, we create a brand, the brand leads to line extensions, whether that's downloadable content; that leads to micro payments, that leads to experimentation on other platforms.

The list is kind of endless, that leads to a franchise.

So the economic opportunity isn't just limited to one release in May.

The economic opportunity extends for years, and then leads, of course, to the next iteration of the franchise.

So I think, I think the strategy is right.

And I think if you tried to say to someone, well, that sounds really good.

We really, really love that.

Now let's do that 100 times as often.

I don't, I don't think that works.

I don't think that's wise.

I think entertainment companies need to focus on what really works and there's no better recipe for success than hits, and Rockstar knows how to create hits.

I'm going to move to your third question, and Lainie will answer your second.

On the comps issue, I think what you're asking is, can you appropriately look at the release of Red Dead and then look at L.A.

Noire and Duke together and say they ought to roughly stack up, and I'd say it remains to be seen how L.A.

Noire and Duke do.Now, I'm not saying that by way of being skeptical because I'm, first of all, I'm the dive-in-all optimist.

Secondly, both titles are phenomenal.

Third, I think they're going to catch a nerve.

And fourth, I think, I think our competition, if they're smart, they're going to get out of our way in May.

Because these titles are awesome and off the charts.

So, they either will or won't comp with Red Dead.

Every title stands on its own in the business.

I will tell you, we are utterly focused on making these titles the biggest hits in the business and I couldn't feel better about both of them.

What's great is they meet different needs.

L.A.

Noire is just, something you've never seen before.

It's a combination of strategy and engagement and human interaction.

Characters you've actually never seen before that seem live, coupled with gut-busting adventure and action.

And then Duke -- look, seem to be coming out of this, these tough economic times.

What do people want from entertainment in times like these?They want to go have some fun.

And there's nothing more fun than Duke.

So I feel great about it.

And, Lainie, on the royalty question?

Sure.

For internal royalties, the number for the nine months is driven by both of our labels.

And we've announced previously for Rockstar's new agreement was a profit-sharing agreement for their entire business.

So it wouldn't just be driven by Red Dead Redemption.

But certainly Red Dead is a big driver overall for the nine months.So it would translate into overall earnings for their business, which would create internal royalties.

Okay.

Great.

Thank you.

Your next question is from Daniel Ernst with Hudson Square Research.

Please go ahead with your question.

It's [David], thank you for taking my call.

Two questions, if I might.

First, can you talk broadly about digital content and DLC being a big part with things like the zombie games with Red Dead, but if you can talk about the overall size and/or growth rate on a year-over-year basis for digital business including APP store, and DLC, and mobile?

Anything in there sort of grouped-together size and growth rate?

And then, secondly, kind of looking at the margins of the business for your October-ending fiscal year, you did about 8.7% from the operating margin.

I think you're on track to 9.5% for the, based on your guidance, for the new March-ending year.

So, you're doing that also without a major GTA.

Where can that go?

What are you thinking about the normalized business, Axe the GTA?

And then what do you think the incremental markings are when you have something like a GTA at the same time?

Thanks.

Daniel, it's Lainie.

For your first question on the digital content, and the, on Dead Nightmare, for the quarter we were at $30.8 million, which was 9% of our net revenue.

That's slightly down from last year since we had some EFLC in that, in the -- we had the Ballad of Gay Tony in that quarter.

So, that was a tough comp for us with the Microsoft arrangement that we had in place.

And then for the nine months, we were at $75 million, which is slightly up from last year in dollars, and then as percent of net revenue it was slightly lower.

And that's all of our digital business together including our DLC.

For the second question on your margins, when we look at each year, we build it from the bottom up.

We look at all of our titles, we pull it together, business from all different labels, all different titles, combine it.

We always strive to increase the margin every single year.

Looking at efficiencies in our cost basis as well as how well our titles can do and additional offerings we can put out for our different titles.

So the direction is certainly going towards up, up, up.

That's where we shoot for.

And, but specific numbers, it really depends on what's on the release schedule and how the titles come together and how they perform overall in the market.

Lainie, maybe if I could ask that a slightly different way.

If you had the ability to grow the margin outside of the title development.

Obviously your hit title is going to be the largest driver of that, but are there other parts of your business, since you guys have restructured so much, reorganized teams, are there other areas -- is there some, is there material amount of margin improvement left in kind of the normalized core business?

Or are you kind of comfortable where you are today?

I think there's still opportunity and the opportunity is going to be driven by growth.

You're incremental -- you're going to drive incremental margin growth with incremental revenue and profit growth.

So if you can maintain an efficient enterprise and keep handling your production costs and your marketing costs, there still can be margin growth.

As you know, though, we tend to focus more here on how much do we invest?

What does it cost to operate the business?

What is the nature of our -- what are the nature of revenues?

And what's the nature of profits and cash flow?

And I'll take that any day over a focus on margins.

Okay, fair enough.

Thank you.

(Operator Instructions)The next question is from Edward Williams with BMO Capital Markets.

Please go ahead with your question.

Good evening.

A couple questions.

First of all, Strauss, can you talk a little bit about if we were to look at Red Dead, what sort of tax rate are you getting for incremental content?

How does that compare to games in the past?

And where might we see kind of that opportunity to upsell more content to the existing consumer going forward?

We don't announce tax rates.

There is some independent third party research on it that I'm sure you've seen.

I will say that Red Dead; Undead Nightmare is extraordinarily successful.

And as you'd expect, and we've now begun to have some real experience with downloadable content, we found that amazingly enough, the better it is, the better consumers like it, the better it sells.

We've also found that bringing it out a bit sooner seems to matter.

And I think what the industry's found, because our experience with downloadable content has been pretty good across the board.

But the industry's found is that, if you look at this as in a cynical perspective, not surprisingly, which is to say sort of build your game and then pull back a piece to sell it later, or sell someone small amounts of incremental content that isn't really great, you're not going to do well with it.

And if you deliver a phenomenal game and then stop and think and deliver incrementally something consumers want to have and must have, they'll buy it all day long.

And I think that sounds like a truism; truth is easy to say, hard to do.Our focus is making sure that if we're going to deliver downloadable content, we do it relatively quickly after the initial release, relatively methodically and predictably, and it will be a lot of game play for the money, and it will be incredibly great.

As you think about it, do you look at this and start thinking that you can do strong downloadable content for 12 months after the initial release?

Or do you not really have a time period in mind as to how long you would support it for?

There seems to be some evidence that the first few months have the most power and bang.

Over time, that may change.

And I think the real question, and we've talked about this before is, whether you can sort of, slide into an MMO from a packaged bids release that wasn't built as an MMO.

And in today's technological environment, I think the answer to that is probably not.

On the other hand, you keep giving people what they want, it depends how long the console cycle lasts, that's certainly a possibility.

And then can you comment a little bit -- I know it's small at this stage.

But can you comment a little bit about the experience with OnLive?

I've heard that Borderlands has done well there.

But just to kind of give us some color as to what you've experienced from it?

Hi, it's Karl.

Look, we're very pleased with OnLive at this point.

I think it's a new platform and we're excited by the possibilities what the platform is.

We don't release differences in terms of what's doing well; Borderlands versus other titles we have up there.

But we can say that it's an exciting platform and we're glad to be a part of it.

Okay, and then last question, Lainie, can you just comment a little bit about the, you had mentioned about $5 million in marketing that was not in the December quarter that you originally anticipated.

I may have mistaken, mistaken the number a little bit.

But can you just comment about the timing of those expenses?

Or is that now falling into the March quarter?

It's a combination of the marketing and lower personnel costs.

So the marketing expense will be moved into the fourth quarter.

And, but it's probably less than half of the $5 million.

And the personnel cost is due to the timing of some new hires, and those will happen later on during the year.

But during this fiscal year and then next fiscal year.

But obviously, the cost won't come through.

In duplicate.

You know what I mean.

Okay, Alright.

Thank you.

Your next question is from Tony Gikas with Piper Jaffray.

Please go ahead with your question.

Hello, good afternoon.

A couple of questions.

On the pricing of downloadable content, do you feel like there's an opportunity to take price higher?

Maybe you could just comment a little bit on the trends that you see there and what you expect looking to the next year.

And second, any comments on what you expect for industry trends here for calendar 2011?

The packaged goods side of the business declined again in 2010 and maybe what your outlook is on the digital of the business as well?

And a quick one for Lainie, it looks like, is it about 8% of your trailing nine-month revenues were digital?

And what could that be in the next fiscal year?

Thanks.

On the pricing of downloadable content, we tend not to talk about pricing publicly.

I don't think it makes a whole lot of sense for us to do that.

We do know that it's our goal to deliver terrific value to our consumers by giving them something that delights them, and pricing it appropriately.

And over time, our experience is if you give consumers what they want, they will pay appropriately for it.

So, I think it remains to be seen.

And Karl will take your comment on sort of the industry trends and packaged goods versus digital.

Hi Tony.

You're right.

The industry has -- software sales have decreased year-over-year for 2010 versus 2009.

But you really can't -- we don't look at it that way.

We look at different segments of the market.

And honestly, the segments that we target have actually shown quite a bit of growth this year, I think double-digit, close to -- approaching 20%.

So for next year, regardless of what the analysts are projecting it's going to do, we're still sanguine on packaged goods.

We think that there's a real market there for us.

The installed base of, of consoles continue to increase.

But at the same time, digital is going to expand as well.

And we fully expect to benefit from the growth of digital.

So, really our philosophy on this is the industry in general is -- we think the industry is ultimately growing for us.

Our target market the growing.

We're going to participate in it whether it's packaged goods, or digital, or both.

And, Tony, on your last question about the 8% growth in the nine months.

We have not announced yet our fiscal 2012 numbers.

So we don't have that number available to break out for you at this point.

But as Karl just mentioned, we continue to look at opportunities in digital, and we'll probably see that growing in the near future.

Okay.

Thank you.

Good luck.

There are no further questions in queue.

I'd like to turn the call back over to Strauss Zelnick for closing remarks.

Thanks so much for joining us today.

Obviously, we're pleased with the results for quarter.

Pleased with our ability to increase guidance for the fiscal year.

And feeling, we're feeling very, very good indeed about our upcoming release schedule and how next year is shaping up.

So thanks for joining us.

This concludes today's teleconference.

You may disconnect your lines.

Thank you for your participation.