Take-Two Interactive Software Inc (TTWO) 2012 Q1 法說會逐字稿

Greetings and welcome to the Take-Two Interactive fiscal first quarter of 2012 results conference call.

(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 at Take-Two Interactive.

Thank you.

Sir, you may begin.

Good afternoon.

Welcome and thank you for joining Take-Two's conference call to discuss its results for the first quarter of fiscal year 2012 ended June 30, 2011.

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 these forward-looking statements based on a variety of factors.

These important factors are described in our filings with the SEC including the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

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

And now I will turn the call over to Strauss.

Thanks, Hank.

Good afternoon and thank you for joining us.

There are three points that I would like to focus on today.

First fiscal 2012 is off to a promising start.

Our first-quarter results were in line with our expectations and we remain comfortable with our financial outlook for the full year.

Second, we have one of the strongest pipelines of titles in development in Take-Two's history.

As a result we are well positioned to deliver substantial revenue and earnings growth in fiscal 2013.

And third we are actively investing to enhance our growth by producing content for online and mobile gaming platforms.

Starting with our first-quarter results, we delivered net revenue of $334.4 million and non-GAAP net income of $0.02 per share both of which were within our previously stated expectations.

We ended the period with $249 million in cash and we have ample borrowing capacity on our undrawn credit facility.

Our biggest new release in the first quarter was L.A.

Noire, the newest hit franchise from Rockstar Games.

This dark and captivating crime thriller has sold in more than 4 million units since its launch in May and has been supported by multiple releases of downloadable add-on content.

L.A.

Noire received terrific scores and has already become a major contender for Game of the Year honors.

It was also the first videogame ever selected for the Tribeca Film Festival.

Critics have hailed L.A.

Noire as quote, a bold cinematic step forward in a genre that is dying for innovation, unquote; and note that it is quote absorbing investigations and intoxicating sense of style make it an unforgettable journey through the seamy side of the City of Angels, unquote.

I would like to congratulate the team at Rockstar in the commercial and critical success of this title.

Our results also benefited from the release of Duke Nukem Forever developed by Gearbox Software and published by 2K Games.

This action-packed shooter ushered in the return of the interactive entertainment industry's most irreverent hero after a decade-long absence.

Although it received disappointing reviews from critics, the release is projected to be profitable for Take-Two.

The Red Dead Redemption franchise has now sold in more than 11 million units worldwide including over 2 million units of the Red Dead Redemption Undead Nightmare standalone disc.

NBA 2K11 has sold in nearly 5.5 million units and it's the best selling title in the history of both our basketball franchise and 2K Sports.

In addition the release of Carnival Games Monkey See, Monkey Do which is our first title design for Kinect for Xbox 360 and an array of other new releases, catalog titles and digital offerings contributed to our results for the period.

Revenue from digitally delivered content increased 49% year over year in the first quarter.

We released successful downloadable content packs for L.A.

Noire, Duke Nukem Forever, Sid Meier's Civilization V and Carnival Games Monkey See, Monkey Do.

The biggest contributors to our digital revenue in the quarter were continued strong sales of the downloadable content supporting Red Dead Redemption, Borderlands, and the Grand Theft Auto franchise.

Add-on content continues to be an important focus for Take-Two not only as a driver of incremental revenue and profits, but also as a means to enhance the longevity and value of our franchises.

As a result of our solid first-quarter results and positive outlook for the remainder of the year, we are reiterating our full-year fiscal 2012 financial outlook.

We are pleased to be able to project continued profitability due to our diverse and balanced portfolio of AAA franchises.

Looking ahead to fiscal 2013, we have one of the strongest development pipelines of announced and yet to be announced new releases in Take-Two's history which Karl will discuss in some more detail.

As a result, we are well positioned to deliver non-GAAP net income in excess of $2 per share for fiscal 2013.

Finally, we are very excited about the growth opportunity presented by emerging online and mobile gaming platforms.

We are currently executing an aggressive and focused strategy to pursue these opportunities by leveraging our intellectual property and world-class development capabilities across all gaming platforms and backing that up with our capital.

In July, we launched our first social networking, Sid Meier's Civilization World for Facebook which is based on our 10 million unit selling strategy franchise.

It is one of the deepest interactive entertainment experiences currently available on Facebook and it has already received critical acclaim and promising consumer response.

We also recently released our 9th offering for Apple's IOS platform, Sid Meier's Pirates!

App for the iPad which is based on another popular 2K Games franchise.

And this is a prime example of how we are able to differentiate ourselves by bringing the highest quality games to any platform.

The Pirates!

App received an 88 rating on Metacritic and it's remained among the top 10 paid apps for iPad since its launch.

Finally we remain hard at work with our Asian partners on our three previously announced initiatives to develop online games.

We expect to update you on our progress later this year.

The online and mobile initiatives we have announced to date are just the beginning of what we anticipate will be exciting new growth opportunities for our Company in the years to come.

We have many other projects underway and we will have more to say about them in the coming months.

To summarize, we are pleased with our results year to date.

Our creative teams remain hard at work on delivering the most innovative entertainment experiences in our industry and we are incredibly enthusiastic about our development pipeline and outlook for growth.

Your management is actively investing to exploit numerous opportunities in emerging online and mobile gaming platforms while continuing to execute our core strategy of delivering the highest quality AAA games for consoles and the PC.

We are all committed to delivering growth, profitability and shareholder value now and over the long term.

I will now turn the call over to Karl.

Thanks, Strauss.

Today I will discuss our lineup of announced new releases for the remainder of fiscal 2012 and fiscal 2013.

Our next significant release comes on September 13 with the launch of Nicktoons MLB, a fun filled family game from 2K Play.

This title pits an all-star roster of animated Nicktoons characters against players from all 30 Major League Baseball teams.

It is our second title to feature support for Kinect and will also be available for the Wii and Nintendo DS.

On October 4, fans will experience the next installment of our top rated and best-selling NBA videogame franchise.

NBA 2K12 will feature three of the greatest basketball legends of all time -- Michael Jordan, Larry Bird and Magic Johnson.

It will also introduce the NBA's Greatest mode which enables gamers to relive professional basketball's most memorable rivalries featuring 15 NBA teams and their greatest players from the past.

Gamers will be able to match these historic teams against today's top franchises to once and for all determine the all time best teams in NBA history.

This fall, Rockstar Games will release the PC version of the critically acclaimed title L.A.

Noire featuring higher fidelity, improved graphical enhancements and 3-D support.

This revolutionary entertainment experience will captivate PC gamers who have been eagerly waiting to step into the breathtaking cinematic world of Hollywood's Golden Age.

We have announced two additional Kinect titles for 2K Play this holiday season -- Let's Cheer!

and Nickelodeon Dance.

Let's Cheer!

utilizes Kinect's voice technology and celebrations the popular support of cheerleading.

The game features authentic cheers, licensed songs and competitive dance routines choreographed by professional cheerleaders.

In Nickelodeon Dance, kid's young and old can stay physically active as they dance alongside their favorite Nickelodeon characters.

In addition to the Xbox 360, Nickelodeon Dance will also be available for the Wii.

On February 7, 2K Games plans to release The Darkness II.

Steeped in dark and twisted storytelling, this game is based on the popular comic book series and is the sequel to the original 2007 title.

The game features unique quad-wielding combat action that enables players to unleash a ruthless force of chaos and destruction by controlling two demon arms while simultaneously firing two weapons.

On March 6, 2K Games plans to launch next, XCOM, an intense sci-fi thriller set in mid-20th century America.

XCOM is a gripping tactical action experience in which the player leads an elite team of special government agents into battle against a vicious and destructive alien force.

Featuring a bold original story, XCOM combines the deep visceral gunplay of a shooter with powerful science fiction intrigue.

An additional slate of new Nickelodeon titles, MLB 2K12, and unannounced titles are also planned for this year.

We have a very strong pipeline of titles in development for fiscal 2013 including BioShock Infinite, Borderlands 2, and Spec Ops The Line.

Currently in development at Irrational Games, the original creator of the 8 million unit selling franchise, BioShock Infinite lifts players out of the familiar confines of [rapture] and rockets them to 1912 Columbia, an immense city in the sky.

BioShock Infinite blew away E3 attendees and judges this year with an incredible demo that won 77 editorial awards including 41 for Game of Show.

Announced just last week, Borderlands 2 is the next installment in the critically acclaimed role-playing shooter franchise which is sold in over 4.5 million units worldwide.

Borderlands 2 features all new characters, skills, environments, enemies, weapons and equipment which come together in an ambitiously crafted story.

The game is featured on the cover of the latest issue of Game Informer Magazine and will be demonstrated later this month at Gamescom and PAX Prime.

Spec Ops The Line is a provocative narrative driven military shooter that's in development at 2K Games and is slated for release during the first half of fiscal 2013.

In addition, we have a robust pipeline of yet to be announced titles in development for fiscal 2013.

I will have more to say about these later in the year.

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

Thanks, Karl, and good afternoon, everyone.

Today I will review our thoughts for the first quarter and then provide some details around our outlook for the second quarter and full-year fiscal 2012.

Note that all the numbers I will be providing today are non-GAAP results from continuing operations unless I state otherwise.

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

For the first quarter of fiscal 2012, net revenue was $334 million as compared to $375 million in the first quarter last year.

As expected, year-over-year comparisons were lower due to the release of Red Dead Redemption last May.

The largest contributor to revenue during the quarter was the release of L.A.

Noire.

Other key contributors included the release of Duke Nukem Forever and Carnival Games Monkey See, Monkey Do and continued strong sales of NBA 2K11 and Red Dead Redemption.

Revenue from digitally delivered content grew 49% year over year to $24.6 million driven by offerings of Red Dead Redemption, Borderlands, the Grand Theft Auto franchise, Duke Nukem Forever, the Sid Meier's Civilization franchise and L.A.

Noire.

Our gross margins for the quarter was 37.8% up 120 basis points year over year.

This improvement was due primarily to a change in the mix of our revenues by title and by label versus the prior year's first quarter.

Operating expenses were approximately $120 million for the quarter.

As expected, this was a significant increase over the prior year's first quarter.

More specifically, selling and marketing expense increased by $25 million in order to support the launches of L.A.

Noire and Duke Nukem Forever.

General and administrative expense increased by $5 million, primarily due to a non-recurring credit for a legal settlement in the prior year's first quarter and higher rent expense resulting from a lease termination this year.

R&D and depreciation and amortization were both about flat as compared to last year's first quarter.

Moving down the income statement, interest and other expense decreased by $1 million year over year as we benefited from a modest foreign exchange gain versus a loss in the first quarter last year.

Our revenue and margin performance enabled us to deliver non-GAAP net income of $2 million or $0.02 per share which was in the range of our expectations.

Our GAAP loss from continuing operations was $9 million or $0.11 per share.

As expected, our earnings were lower year over year due to the release of Red Dead Redemption in the first quarter of fiscal 2011.

Turning to some key items from our balance sheet, we ended the first quarter with a strong cash balance of $249 million.

Our accounts receivable balance was $147 million reflecting the releases of L.A.

Noire and Duke Nukem Forever during the quarter.

Inventory was $26 million, approximately flat versus March 31.

And software development costs and licenses decreased to $243 million from year-end reflecting the amortization of capitalized costs to develop L.A.

Noire and Duke Nukem Forever.

Now I will provide our outlook for the full year and second-quarter fiscal 2012 which is all provided on a non-GAAP basis.

For the full year, we are reiterating our previous outlook.

We continue to expect revenue to range from $1 billion to $1.1 billion and non-GAAP net income to range from $0.10 to $0.35 per share.

Our expectations for margins and expenses that underly this outlook remain mostly unchanged from what we provided on our last earnings call.

Specifically we continue to expect gross margins in the high 30s.

We now expect total operating expenses to increase by about 15% year over year and we continue to project interest and other of approximately $8.5 million, taxes of about $9 million and diluted shares of approximately 90 million.

We have also assumed the following key release dates.

Nicktoons MLB is expected to be released in our fiscal second quarter.

L.A.

Noire for PC, NBA 2K12, Let's Cheer!

and Nickelodeon Dance are expected to be released in our fiscal third quarter.

The Darkness II, XCOM and Major League Baseball 2K12 are planned to launch in the fiscal fourth quarter.

In addition included in our outlook are some other titles planned for release later in the year.

We will have more to say about them in the coming months.

We are also issuing our initial outlook for the second quarter as follows.

We expect to generate revenue ranging from $70 million to $85 million as we have no planned major releases and the majority of our revenue will come from our catalog offerings.

As a result, we expect a non-GAAP loss ranging from $0.55 to $0.65 per share.

Moving down the income statement, we expect second-quarter gross profit margins in the high 30s.

Total operating expenses for the second quarter should decrease by approximately 19% year over year.

More specifically, selling and marketing expenses is expected to decrease by about 39% as the prior year quarter included marketing campaigns to support the releases of Mafia 2 and Sid Meier's Civilization V.

General and administrative expense is expected to increase by approximately 5% primarily due to higher rent and IT expense.

R&D expense is expected to increase by approximately 6% primarily due to additional staffing at our studios.

And depreciation and amortization expense is expected to decrease by about 20% as certain assets have become fully depreciated since last year.

Our second-quarter outlook also reflects forecasted interest and other expense of approximately $2 million, tax expense of approximately $2 million and an estimated share count of approximately $83 million.

In summary, fiscal 2012 is off to a solid start and we continue to expect to deliver non-GAAP profits for the full year.

For fiscal 2013, we have already announced three new AAA releases including BioShock Infinite, Spec Ops The Line and Borderlands 2, and we have a strong pipeline of other titles in development.

We will also benefit from the sunset of our MLB license which has been generating a significant loss.

As a result we expect to achieve substantial earnings growth in fiscal 2013 including non-GAAP net income in excess of $2 per share.

Now I will turn the call back to Strauss.

Thanks, Karl and Lainie.

We are enthusiastic about the opportunities that are on the horizon for Take-Two and our achievements to date.

Our entire team is laser focused on executing our strategy in order to bring these opportunities to fruition and deliver value to our customers, business partners and shareholders.

I would like to thank our colleagues for their continued dedication and shared commitment to that goal.

We will now take your questions.

Operator?

(Operator Instructions).

Arvind Bhatia, Sterne, Agee.

The first one is on the ongoing NBA strike, wondering how that factors into your guidance for the year?

And then digital growth obviously continues to be impressive.

I'm wondering if there's any color for the balance of the year based on the pipeline that you expect?

The lockout isn't good news for anyone who is involved with basketball.

That said -- and historically, lockouts have not been good for interactive entertainment products related to the underlying sport.

That said, we have terrific titles.

Last year's release has sold in more than 5.5 million units and had an 89 Metacritic rating which was a record for the title and a record for 2K Sports.

We think this year's title is even better.

Our interactive entertainment products for basketball are as close to live-action as anything you will see in the market, and it is our hope that if a lockout does continue -- and obviously we hope it does not -- but if it does, that this is a place where you can enjoy basketball on a television screen.

And I think we will market it accordingly.

We are also really pleased with our cover athletes and with the game itself and the way it is shaping up.

So we think October 4 will be a very good day for our Company no matter what and we think we can mitigate any issues that come out of the lockout.

Certainly that is our goal.

Lainie?

So in terms of digital for the rest of the year, we have not really shared that specific forecast.

But for Q2 you can see as a percentage of sales, it will probably be a strong number as we have no new releases in the period and a lot of our catalog is being digitally delivered, so we should see that number as a percentage of sales be pretty strong in that quarter.

For the rest of the year, we are looking at it on a title by title basis and we have some strong offerings that are coming out.

But versus last year we have some other titles as Red Dead Redemption and Borderlands that will be comped against it.

So we will have to see how the rest of the year shapes up.

James Hardiman, Longbow Research.

I just wanted to have a quick follow-up on the NBA question.

How much of your plans are fluid and could ultimately result -- ultimately change as a result of what is going on in the strike?

It sounds like the October 4 date is pretty firm regardless of what you see with the lockout.

If it extends into the season, would you potentially put that game out a little bit late?

And ultimately that $0.10 to $0.35 that you're talking about for the year, do you still think you could make those numbers regardless of what is going on with the strike?

I think you answered that question but I just wanted to make clear.

It would be very unusual for us to change the date for that reason.

We don't contemplate it, although I suppose it is possible.

But it really isn't expected.

And we remain confident in our guidance for the year.

Okay, and just real quick here, last year and presumably this year I would assume that it would be the same.

With an October 4 release date, none of that product is shipping here in the second quarter or how should I think about that historically as well as this year?

Yes, we don't ship that product in the second quarter.

That is right.

Mike Hickey, Janco Partners.

The first question, I don't think anyone is going to say the video game industry is recession proof.

Looking forward, it looks like we may go into another period of contracted economic environment.

So Strauss, I'm just curious how you think your games specifically will hold up if we go into another difficult stretch?

And then also as a follow-up, we have a couple of new platforms coming out from Nintendo and Sony, and I'm curious how you plan to manage your R&D to support those releases.

Look, while as tempting as it may be for me to wax eloquent about the state of the global economy, I don't think anyone wants me to do that on this call.

The entertainment industry is not countercyclical despite what people say.

After the 2008 global financial crisis, we suffered, our competitors suffered, our numbers suffered.

We don't wish it on anyone.

That said, I think our strategy is one that is meant for good times and bad, and that's one of the reasons we designed it.

We put out a limited number of what we hope will be the highest quality releases.

Metacritic says we do that.

As of their most recent report, we put out the highest quality releases of any publisher in the business.

And what that means is when it is only a limited number, we are not asking consumers to show up every day or even every week.

We are saying come out a few times a year when we give you a real reason to turn up, and they do.

And most recently with the launch of another new hit franchise for our Company in L.A.

Noire.

So when times are tough, people still do consume entertainment, they just tend to be more selective.

So it is the titles in the middle that really get hurt.

It is the B plus titles that are still expensive.

Years ago we talked about the barbell effect in the business as the economy got tighter, and we designed our strategy accordingly.

There's always room for blockbusters, there's always room for a budget title or an inexpensive catalog title.

What gets lost is an expensive title that does not distinguish itself, and we try really hard not to make products like that.

We are utterly focused on quality and we think quality withstands the test of even a difficult time.

Also it's a company that was profitable last year.

We project profitability this year.

Obviously we are not unmindful of the economy as we make those projections.

We have nothing drawn on our credit facility.

Our convert is expected to be satisfied with equity.

So effectively one could argue that is not debt.

And we announced that we have $249 million of cash.

So while none of us wants to go into a storm, if you have to weather one, we would like to take it from this seat.

In terms of the new platforms that are coming out, you mentioned the Nintendo and Sony platforms and how we manage our R&D in that context.

I would say we manage our R&D in that context the same as we would in any situation with a new platform or even during an existing cycle.

For us, it is really look about looking at the IP first, figuring out what we want to accomplish from a game perspective and then finding the right platforms to put those games on.

And obviously new platform introductions are very exciting for us because they allow us to do things that we could not otherwise have done before.

They can also be disruptive because there's a question of you're learning how to develop for a new platform and is that going to cost you a bit more money.

But the truth of the matter is we deal with advances within console generation -- within console cycles all of the time.

So we are constantly pushing forward and pushing our IP forward.

So for us I don't think we really see a sea change in terms of how we manage our R&D cycles as new platforms come out.

Brian Fitzgerald, UBS.

As you guys have your first Kinect focused titles out for a couple of months now, can you give some color around what type of traction or engagement you are seeing with those titles?

And has it caused you to adjust your thoughts about future Kinect titles or future Kinect integration going forward?

Yes, we are actually -- we do have some Kinect titles out.

We have announced that we've got a couple more coming out in the coming months.

And I would have to tell you that we are extremely pleased with that platform.

The Kinect allows you to do a lot of exciting things and we are sanguine on it and obviously we are because we continue to come out with products for Kinect.

So I would say our perspective on Kinect specifically is positive.

Our outlook is positive and we plan to support the platform going forward.

Great, thanks.

And then maybe one follow-on.

You are seeing some publishers release subscription-based services around console titles.

How important do you guys think these type of services are to the industry or to the digital business model going forward?

Well, for years we have talked about the possibility of transforming a single issue packaged goods business into a subscription business.

And you are right, a couple of our competitors won -- a notable competitor -- are experimenting with those sorts of models.

We are glad that they are and wish them success and we intend to learn from it.

Our approach to that has been to put out the highest quality digital delivered content in the business.

That has been immensely successful for us.

We have shipped more than 2 million units of Red Dead Redemption Undead Nightmare on disc standalone.

So that is a pretty extraordinary result and we get that result because we are offering phenomenal quality and a really strong value to consumers.

I think the watchword here is quality and value.

I don't think anyone believes you can create a subscription business unless you give consumers something really special.

I don't think our competitors believe that incidentally.

So it remains to be seen.

I think it's certainly an area of opportunity, and as you know, we are experimenting and focusing and investing in any number of new areas and in any number of new business models.

Daniel Ernst, Hudson Square Research.

I know we are going to learn more about your upcoming digital strategy for online and mobile in the future, but maybe if you can talk a little bit about it kind of big picture.

You had mentioned that one of the things that you are proud about on Sid Meier both Facebook and on the iPad is the high critical ratings that you're getting.

So you are bringing kind of what I would call a gamer's game to a new platform.

If you look out five plus years, how do you see the market kind of being split?

Is it going to be hard-core games still making up the majority of it or are we going to be able to continue to grow kins of the Farmville model where we are taking pennies from a lot of non-gamers?

How are you guys kind of looking at that in terms of your strategy where your assets are in teams that make some of the highest rated games in the world against an opportunity that is growing faster in selling games to non-gamers?

Sort of walk me through how you look at that big picture.

In a tech driven business, trying to make a prediction five years hence is really -- is fraught with risk.

I think -- and I have spoken about this publicly and I will try to keep my answers somewhat concise -- that the way the world looks is going to be influenced by among other things a huge explosion in tablets which will be used for entertainment in addition to communications and information.

And they will be really good game platforms and they will be every bit as powerful as PC.

We will be informed by the ability to have intelligence in the cloud that really works with no latency.

Obviously we have seen the early investment in those areas with OnLive and others but it is still early for that.

There will be multiple services.

And within five years we are going to see a new generation on the console side.

And what a console is or isn't probably will change and what that eco-system and the economic model related thereto will almost certainly change.

What I think you can expect is that we will be engaged in every part of the interactive entertainment business.

which means we are going to put out tent-pole releases which are the equivalent of what console type releases are today.

And you will also see us participating in the MMO business.

We have three projects in Asia that are coming along swimmingly and we expect those and others will be successful and that we will do more.

And you will see us participating in the social networking space as well, and we have launched our first release there with Civ World for Facebook.

It's early days for all of this.

The business that's Xanga is in is only four years old.

It is an enormous business.

It's been projected to grow rapidly and I don't doubt that that business will evolve and certainly our experience and our participation will evolve.

I can't call what percentage will lie where.

What seems to be obvious is that interactive entertainment is attracting a broader and broader base of customers, that our average customer skews male and it's in his mid-30s and that Xanga's customer skews female and is in her mid-40s.

And in 10 years or five years, I have to believe interactive entertainment becomes more and more global and a broader demographic phenomenon.

And that inerts to our benefit.

As long as we keep currency with our strategy of making the highest quality products, maintaining enormous efficiency and focusing on innovation, and doing that with a backdrop of rational business operation and a conservative approach to finance, and that is what we aim to do.

Just to add just a little bit to that because I think you asked this question but I'm not exactly sure.

In terms of -- you seem to be implying a comparison between sort of more of the hard-core or traditional gamer versus the casual gamer.

I can tell you one thing we don't believe here, is that we don't believe that the emergence of some of these platforms that you can characterize as more casual is necessarily or will not lead to the dumbing down of gaming in general.

It's not going to make all of a sudden the fact that you can play Farmville on Xanga which satisfies a very specific audience, that does not scratch the same itch as playing Grand Theft Auto or BioShock or one of our other titles.

And I don't think that dynamic ever changes in the gaming business.

Yes, that's right, Karl.

That is kind of what I was asking.

You're platform agnostic but what makes Take-Two Take-Two is your content regardless of the platform.

So I talked for 10 minutes and Karl answered the question in 15 seconds which is pretty much the way things go around here.

Thanks, guys, for the answers.

I liked them both.

Atul Bagga, ThinkEquity.

A couple of questions for you.

Just on NBA, can you talk about the variability of NBA?

If there is a lockout and if there is no lockout, what is the variability of NBA on revenue as well as on the EPS side?

Second on your digital initiative, can you talk about your mobile and online, what percentage of your digital is coming from these two platforms currently?

And where do you expect this to be next year?

And lastly on social mobile, currently do you see this more as broadening your awareness, broadening the brand awareness of your civilization or other products that you're launching here?

And if so, what is the kind of impact you are seeing from mobile initiatives on the console business?

And the last one actually is if you can give us any update on NBA Online in China.

Yes, just in order, we don't have any expectations that what will happen on the lockout which is obviously subject to speculation will influence where we are going to land this year which is why we reiterated our guidance.

And if that changes, we will obviously let people know.

We don't expect it to.

We don't break out mobile from other forms of digital distribution.

In terms of social mobile, it absolutely -- our strategy there is absolutely to take our brands and our franchises and bring them to where consumers are and where they are interested, but only to do so in a really high quality way.

And so we are not just doing it to promote the brands, we are doing it to make money.

That is the reason we are doing it.

We are investing behind it because we think there is a business opportunity and so far it is panning out quite well.

And we don't have any updates for NBA in China in this call except to say that the project is going along very well.

Eric Handler, MKM Partners.

A couple of things.

First in terms of your downloadable content, you gave some good color on Red Dead Redemption and a couple of million units sold there for DLC.

Is that what you would view as a typical attach rate that you would expect for something like a Duke Nukem or L.A.

Noire?

Also if you could talk about price points that you are seeing that work best for DLC.

And then secondly in terms of your guidance, you said there are some titles that have yet to be announced and as I look out at your full year, are these titles that could be needle movers that allow you to get to the numbers you expect to or are these more Tier Two, Tier Three type titles like the 2K Play titles, something like that?

Yes, we tend not to talk about typical attach rates.

I know it's sort of a backwards looking analysis.

We put out downloadable content when our creative teams think they have something really interesting and compelling to issue when we think consumers are going to love it.

And so far, our track record is incredibly strong at doing that.

By the way, the number I gave you for Red Dead was actually the retail SKU, the 2 million units, standalone retail disc.

And we would never talk about price points in this situation.

It's just not appropriate.

However it is our goal to deliver value to customers.

I think we should be proud of doing that.

And some of our competitors have been criticized for not doing that.

We really aim to make sure that when the consumer [buys that on] content, he or she comes away from that experience happy.

In terms of your guidance, we would not parse it in that way.

But I think I know what you're getting at, and the answer is there's no Hail Mary built into our guidance.

We have reiterated it because we believe in it and we just met our guidance for the quarter and we either met or exceeded our guidance for I believe seven quarters in a row.

That does not mean that we always will, but we aiim to.

(Operator Instructions).

Doug Creutz, Cowen & Co.

I guess looking ahead to Q4, you have announced XCOM for March 6, and I saw that game at E3 and it's an interesting looking game, but it also seemed somewhat reminiscent to me of Mass Effect and I'm sure you are aware that EA is putting out Mass Effect 3 on the same day.

Just wondering what your thinking is and why you picked that particular date and how set you are on it?

Thanks.

Well, that is the date that we have announced.

That is the date that we plan to release the title.

I do think that -- look, EA is coming out with Mass Effect.

I would not necessarily compare those two titles.

I think that XCOM is a very unique title and it's got something very unique to bring to the table.

So I would not necessarily make that direct comparison.

And look, at the end of the day, when we release a title is a function of two different things.

It is when the title is ready from a development perspective and when -- what the right marketing window is.

And March for us -- that date in March, that is a combination of both of those things.

When we think a title is going to be ready to release from the development perspective and the right window for us to get a release to the consumer in the best way.

James Hardiman, Longbow Research.

Thanks for taking my follow-up.

I had a question on gross margins in the quarter.

They were up versus last year despite the 11% decline in sales.

You mentioned it was a mixed issue.

I was wondering if you could just give us a little bit more color on that?

Was it sort of the mix of licensed product?

Was it the fact that digital was up so much in the quarter?

I know you said that digital does not typically carry meaningfully better margins for you guys.

But I was wondering if you could give us a lot bit of color there?

Well, for digital, it is not -- the margin itself is pretty much in line, but the margin percentage if it's driven by our [catalog usually] delivered titles, it can be slightly on the higher end of the range of our overall margin range that we usually talk about.

For the overall business though for the quarter, it was really -- it was a mix of the different labels and also the different titles that came through in the quarter.

We had some titles that were internally developed, some externally developed and we also had some that were subject to internal royalties.

And that is really what drove the mix of the quarter.

Great, and then I will just ask sort of the obvious question that I think everybody draws their own conclusion to, but I will ask it anyway.

The $2 number for fiscal 2013, I think the assumption is that you would not be able to get to $2 plus without a GTA title in there but obviously you have not actually said anything about GTA in fiscal 2013.

Is there any way that you could get to $2 or more without a Grand Theft Auto title for next year?

If it is a math question, I think I would just refer back to the diversification of the organization and it continues to be a focus of the Company, and we delivered very strong profitability last year for example driven by Red Dead Redemption and other hits.

So the Company continues to focus on building new franchises, diversifying its approach.

There also are other benefits next year including the sunset of the MLB agreement which has been creating a loss.

Fair enough, and then just I guess then to delve into the MLB, you have historically given us some numbers as to how much of that loss -- how much of a loss that typically generates.

Would you mind updating us on the most recent iteration of that gain?

Was this year better, worse than sort of the historical numbers you have thrown out there?

And any idea looking forward is it going to be a cancellation of that agreement or is it going to be just a more profitable one?

Yes, we have announced the nature of the loss in the past.

There is really no update and we don't talk about our agreements, potential agreements with licensors except to say that obviously we are not in the business of entering into agreements that we believe will not benefit the Company.

Arvind Bhatia, Sterne, Agee.

Just a follow-up.

One, Lainie, what was the catalog sales number this quarter?

And second, I was wondering what your views are on buybacks at this point with the stock -- given the market conditions and given where the stock hit today, just that or in general what your views are on buybacks?

Arvind, our catalog was about 11% of our net sales for the quarter.

And on buybacks -- this is Strauss -- the research, sort of the academic research on buybacks is most stock buybacks don't tend to create shareholder value.

It's an area of some debate.

There's been an enormous amount of scholarly research on the topic.

Generally speaking, they just don't benefit consumers.

Usually their management team's trying to benefit their EPS and to make a point to the market and the effect isn't terrific.

That said, at any time where someone believes that there's a significant disjunction between market and value, that would be an appropriate time to contemplate such a thing.

Years ago we didn't have the capital of availability to contemplate decisions like that.

We are in a position now where we have a very solid capital base, so we have a lot of flexibility.

But I would not say more than that at this time.

Mr.

Zelnick, there are no further questions at this time.

I would now like to turn the floor back over to you for closing comments.

Great, well thank you all for joining us.

I know you have a lot of other things to focus on given today's market conditions.

We are strictly focused on our knitting and our strategy remains consistent, our results are in accord with our guidance.

We are confirming this year's guidance.

We are optimistic about the future and we appreciate your support.

Thank you.

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

You may disconnect your lines at this time.

Thank you for your participation and have a wonderful day.