Take-Two Interactive Software, Inc.
Q1 2008 Earnings Call Transcript

Published: 12 Mar 2008

[Operator:]

Greetings, ladies and gentlemen and welcome to the Take-Two Interactive first quarter 2008 results. (Operator Instructions) It is now my pleasure to introduce your host, Ms. Cindy Buckwalter, Executive Vice President for Take-Two Interactive. Thank you, Ms. Buckwalter. You may begin.

[Cindy Buckwalter:]

Thank you. Welcome and thank you all for joining us for today’s call. Before we begin, I would first like to quickly 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 and assumptions made by our management and information currently available to us at this time. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors, including the risks related to Electronic Arts’ unsolicited acquisition proposal. These important factors are described in our filings with the SEC, including our 10-K for the fiscal year ended October 31, 2007, and our 10-Q for the first quarter ended January 31, 2008, which we are filing today. These filings may be obtained from our website at www.taketwogames.com or by contacting the SEC. Today’s one-hour call will be led by Strauss Zelnick, Chairman of Take-Two; Ben Feder, our CEO; and Lainie Goldstein, our CFO. We are also joined by Seth Krauss, our Chief Legal Counsel. The entire team will be available to answer questions you may have during the Q&A session following our prepared remarks. Now let me turn the call over to Strauss.

[Strauss Zelnick:]

Thanks, Cindy and good afternoon, everyone. Thanks for joining us. Before we review Take-Two's results for the first quarter, I want to take this opportunity to offer our perspective on Electronic Arts’ unsolicited $26 per share proposal to acquire our company. While we have no new information today beyond our prior public statements and filings, we feel it’s important to reiterate the position of our board of directors. That position simply is that EA’s proposal undervalued the company and wasn’t in the best interests of Take-Two's stockholders. In addition, while our board expressed a willingness to discuss the matter with Electronic Arts after the release of Grand Theft Auto IV in April, they refused. To be more specific, the EA proposal failed to value fully Take-Two's extensive portfolio of top-selling brands and our extraordinary creative and [human assets]. It ignored the tremendous operational progress we’ve made in the past year and our solid plan going forward. It was substantially lower than the values according comparable companies and creative assets by Electronic Arts and by the market as a whole. And it failed to compensate Take-Two shareholders for any of the synergies EA would receive from the business combination. I think it’s worthwhile to spend a moment considering these points since they bear on our discussion today. Any review of Take-Two's value has to start with our interactive entertainment franchises and the extraordinary creative teams who bring them to consumers and delight consumers. We have one of the highest quality product lines in the industry according to Metacritic rankings. Our franchises are some of the most popular, durable, and valuable brands in the business and we think those brands will only grow in value as the current console cycle reaches its full potential over the coming years. A chief source of value is our Grand Theft Auto franchise. It sold over 66 million units to date. It’s not only Take-Two's biggest hit -- it’s the industry’s biggest hit. The release of Grand Theft Auto IV is now about seven weeks away and anticipation is running high, both in terms of the game play experience that’s expected and the revenue and profit potential. We are highly confident that Grand Theft Auto IV will exceed the expectations of even the game’s most devoted fans and that it will set a new milestone for this incredibly valuable franchise. In addition to Grand Theft Auto, our uniquely valuable franchises include over 20 other brands that have sold over a million units each. More than half of these are internally owned and developed and we believe our proprietary intellectual property is among the best in the industry. To cite just a few examples among our established franchises, Midnight Club has sold over 11.5 million units; Max Payne, over 7 million units; Civilization, over 8 million units; Mafia, over 2 million units. And the initial versions, the first releases of our newer franchises have also performed extremely well. This is just the beginning for Bioshock, which has sold over 2 million units; Red Dead, Manhunt, and Bully, over 1.5 million units, and Carnival Games, over a million units and selling well. And our sports franchises have been highly successful and we are really proud of how sports is doing -- the NBA 2KA franchise, nearly 6 million units; the MLB 2K franchise approaching 5 million units. As long-term followers of Take-Two know, we began a significant revitalization effort early in 2007 and even though it’s just a short time later, we’ve already begun to see significant and positive impact on our effectiveness and our productivity. To highlight just a few of the areas in which we’ve made enormous strides

[Benjamin Feder:]

Thanks, Strauss. We’re extremely pleased that once again we outperformed our expectations. Net revenue was over $240 million, beating the upper end of our guidance. On a non-GAAP basis, the net loss per share was negative $0.41 and exceeded the most optimistic end of our range by $0.09. As a result of the positive first quarter developments and our strong pipeline, we are raising our fiscal 2008 guidance today. Lainie will detail our guidance and review our first quarter performance later in the call but I’d like to make a few observations. With no major new release during Q1, the majority of our revenue came from our strong catalog. We benefited from the sales of three internally owned and internally developed titles, namely Bioshock, Carnival Games, and Manhunt 2. Grand Theft Auto was also a significant contributor, both from catalog sales of various GTA titles and from the release in Japan of Grand Theft Auto

[Lainie Goldstein:]

Thanks, Ben and good afternoon, everyone. I’ll be covering several topics today. First, a review of first quarter results; second, our outlook for fiscal 2008; and third, our guidance for the second quarter. Let’s look at our Q1 results. Net revenue was $240 million compared with $277 million a year ago. Non-GAAP net loss was $30.3 million compared to a non-GAAP net loss of $10.3 million last year, with a loss per share of $0.41 compared to a loss of $0.14 last year. Please see today’s press release for a reconciliation of our non-GAAP to GAAP numbers. We are pleased that we exceeded our guidance for a third quarter in a row. Sales of Carnival Games surpassed our expectations, as did our catalog sales. Jack of All Games top line performance was also better than expected. Our GAAP results for the first quarter were a net loss of approximately $38 million, or $0.52 per share, compared with a loss of $21.5 million, or $0.30 per share in the first quarter of 2007. Our GAAP results included $6.1 million in stock-based compensation expense and a total of $1.7 million in business reorganization costs and expenses related to unusual legal matters. As expected, our decline in revenue year over year was due to a decrease in publishing sales, as we had fewer new releases this quarter compared to the prior year. Our leading titles in Q1 were Carnival Games, NBA 2K8, Bioshock, and GTA catalog titles. Our sports business was once again a strong contributor to revenue, representing about 26% of our publishing revenue. Jack of All Games business also grew, led by strong next-gen hardware and software sales. In looking at our consolidated results, our non-GAAP gross margin for the quarter was 22.9% compared to 26.6% last year. The decrease in our gross margin compared to last year is primarily due to our revenue mix. Distribution was a greater percentage of revenue compared to Q1 of last year and the significant percentage of our publishing revenue was comprised of catalog titles instead of major new releases. In addition, gross margins were slightly lower than we expected as a result of approximately $5.9 million of accelerate amortization of capitalized software and licenses due to reduced sales expectations for certain titles. Our split between North America and international revenue was 84% to 16% in Q1. Our sports and distribution businesses skew these numbers relative to our peers because these businesses are primarily North American based. If you back out sports and distribution and look at this number for the last 12 months, our North America/international revenue split was about 60% to 40% compared to about 56% to 44% for the same 12 month period a year ago. Non-GAAP operating expenses in the first quarter were approximately $80.5 million, down from last year’s first quarter. G&A expenses accounted for the largest reduction year over year, mainly due to our cost savings initiatives. Sales and marketing expenses decreased as a result of lower advertising spend as we had fewer new releases. These reductions were somewhat offset by an increase in R&D expense resulting from continued investment in our studios and the acquisition of Illusion Softworks. We’re not showing any tax benefit on our losses. As we said on previous calls, due to our domestic cumulative losses for the past three years, we are required to record a valuation allowance to reduce our deferred tax assets. We had a provision for taxes in the first quarter because we were a taxpayer in some of our international territories. I’d like to highlight a few areas of our performance. We have shipped over 1 million units of Carnival Games. U.S. sales of NBA 2K8 for PlayStation 3 and 360 combined have outsold sales of NBA Live for those platforms according to NPD, and our strong catalog sales further prove the significant value of our internally owned brands. Moving on to our balance sheet, at the end of Q1 we had approximately $54 million in cash and $36 million of borrowings on our credit line. Based on our forecast cash needs, we expect to draw down on the line further in Q2 and then we will begin to generate cash in Q3 following the release of Grand Theft Auto IV. Our accounts receivable reserve was about $53 million at the end of the quarter, which represented approximately 46% of gross receivables. Inventories at the end of the quarter were approximately $82 million, which is comparable to Q1 of last year. The increase in our software development costs and licenses is primarily related to the key titles planned or release over the next 12 to 18 months. This includes Grand Theft Auto IV, Midnight Club

[Strauss Zelnick:]

Thanks, Lainie. I think you’ll all understand our great confidence in the value being created at Take-Two by our exceptionally talented people, our industry leading franchises, and our successful revitalization efforts. We’ll continue to manage the company for the benefit of our stockholders and we are highly optimistic about our future. We’ll now take any questions you may have. Operator.

[Operator:]

(Operator Instructions) Our first question comes from the line of Heath Terry with Credit Suisse.

[Heath Terry:]

Great. Thank you. I guess one just kind of housekeeping issue; the $5 million in accelerated depreciation, can you let us know what titles that was driven off of? And then Lainie, as you were talking about the key titles for ’09, it was kind of noticeable that there were not Rockstar titles that were mentioned there. I guess if you guys could talk about how you plan on managing Rockstar’s pipeline. We’ve got two Rockstar titles coming out this year. Is that generally going to be the run-rate that we would expect? And then, now that GTA is done, if you can give us an idea of what your goal is in terms of the next iteration of that title.

[Lainie Goldstein:]

Heath, the acceleration of the amortization, we don’t share those specific titles when we do that but we do look at the projected sales of certain titles and that’s how the acceleration happens by title, based on the projected future sales of those titles.

[Benjamin Feder:]

And Heath, apropos of the run-rate from Rockstar, I wouldn’t draw that conclusion. We actually said that we would -- there’d be at least one title coming out of Rockstar, one major triple A title coming out of Rockstar in 2009.

[Heath Terry:]

Okay, but that’s the only one that we -- we should only expect one?

[Benjamin Feder:]

That’s the only one we’re announcing today.

[Heath Terry:]

Okay. Great.

[Operator:]

Thank you. Our next question comes from Benjamin Schachter with UBS Securities.

[Benjamin Schachter:]

I just want to go over a few things. One, now that the game is basically done, should we expect any meaningful differences in how it plays on PS3 versus Xbox 360? Also, I noticed that there’s no football here. Is that -- are you out of the football business? And then I believe in one of the footnotes here, it talks about $2 million options going to ZelnickMedia. I was wondering if that had already been announced or where that’s coming from. Thanks.

[Benjamin Feder:]

In terms of PS3 versus 360, the games will be identical with the exception of if there is a -- if there are differences on the platforms, you may see some of that. So for example, there is a slightly warmer color palette on the PS3 but beyond that, they’ll be identical games. And then obviously the exclusive content on Xbox 360, the periodic content after the game is released. So that’s Xbox 360. Strauss, do you want to talk about the ZelnickMedia?

[Strauss Zelnick:]

I’m not sure I understand your question. There are no new option grants. You may be referring to our initial management agreement had roughly 2 million, just a hair over 2 million shares of options granted, divested over a period of time. That’s about a year old.

[Benjamin Schachter:]

Okay, and then on football?

[Benjamin Feder:]

On football, we’re looking at it. We took it out of -- it’s not on the schedule today but we’re continuing to evaluate our options there.

[Benjamin Schachter:]

Okay, thanks.

[Operator:]

Thank you. Our next question comes from Daniel Ernst with Hudson Square Research.

[Daniel Ernst:]

Good evening. Thanks for taking the call. First question on the ongoing restructuring efforts; obviously you’ve hit some of the low-hanging fruit and taking cost out of the business. I’m just wondering if you think there’s any additional headroom to remove costs from the operations and/or perhaps there are certain product sets or studios that are still a drag to P&L that you might be trying to break even, or perhaps just cut out all together, looking at the going forward operating model. And then another question on the potential lineup, anything to read out of the recent news of a Max Payne film production? Any insight into when that might be [a game again]? Thanks.

[Benjamin Feder:]

On the costs, just to be clear, we’ve done our restructuring and we think we have a very lean and efficient organization. That said, we’ve stated a willingness, an interest, and an ability to continue to drive efficiencies, and those would be driven really through third-party vendor costs and outside [costs]. This is a growth business. We think we have the best people in the business and the best intellectual property in the business and we’ve stated a desire to grow our business, and so no, quite the opposite. There is no drag at the studios. We have the right studios. We now have them in the right places and if we could continue to hire the quality of people that we’ve been able to attract and keep at this company, we’d be very interested in hiring more of them. And I think you should expect to see opportunities like that in the future.

[Daniel Ernst:]

And sports is near or approaching break-even?

[Benjamin Feder:]

We are in the same position on sports we were before, which is to say we expected it to be a contributor this year and we feel good about the way sports is performing.

[Daniel Ernst:]

So you think sports could be a contributor to earnings in this coming fiscal year, or this fiscal year now?

[Benjamin Feder:]

We’ve said that before and that’s still the case.

[Daniel Ernst:]

Great. Max Payne?

[Benjamin Feder:]

In terms of Max Payne, it’s -- what’s the word? We will sell no wine before it’s time. It’s a little early to comment on any particular title but we have a lot of interesting things going on.

[Daniel Ernst:]

Okay. Thanks a lot.

[Operator:]

Thank you. Our next question comes from the line of John Taylor with Arcadia Investment Corporation.

[John Taylor:]

I’ve got a couple of things as well. I wonder, on the balance sheet you’ve got an income tax payable line of $28 million at the end of the quarter and it doesn’t look like that was the case in October. Can you explain what that’s related to?

[Lainie Goldstein:]

Sure. That’s a reclassification due to our adoption of FIN-48 during the quarter, so we were forced to reclassify our reserves for our uncertain tax positions and move it to a long-term, so it’s out of our accrued expenses and it’s in an income tax payable in the long-term asset section.

[John Taylor:]

Okay. Is that subject to future performance or anything, or is that a real payable at this point?

[Lainie Goldstein:]

No, that’s a -- it’s an income tax reserve.

[John Taylor:]

Okay, and primarily related to international?

[Lainie Goldstein:]

Not necessarily. It’s overall reserves on the overall business.

[John Taylor:]

Okay. But at the same time, you’ve got some NOLs in the U.S. It’s probably a pretty significant number right now?

[Lainie Goldstein:]

Yes, that’s true.

[John Taylor:]

Can you give us what that is?

[Lainie Goldstein:]

We don’t share the specific NOL number but you’ve seen our losses over the last couple of years, so it’s significant. So we’re not -- we’re currently still not a U.S. taxpayer and we don’t plan to be next year either.

[John Taylor:]

Right. Okay and then, could you quantify the catalog? Was it like all of the sales? I don’t remember if you had anything fresh in the first quarter.

[Lainie Goldstein:]

We did. We had College Hoops ship during the first quarter and we had Dora the Explorer and Go Diego Go ship, and we also had the reorders from Bioshock and Carnival Games was a huge hit this quarter for us.

[John Taylor:]

Right, so the catalog as a percent of published revenue was exactly what or pretty close to what? Percentage wise, maybe?

[Benjamin Feder:]

About 44%.

[Lainie Goldstein:]

Forty-four percent.

[John Taylor:]

Of published?

[Lainie Goldstein:]

Of publishing, yes.

[John Taylor:]

Okay, great. And then, when you report your numbers in the second quarter, it looks like we’re going to have some profitability so what’s the full dilution count going to look like when that happens?

[Lainie Goldstein:]

It’s going to be about 75 million shares.

[John Taylor:]

Okay, great. And then, there’s been some press coverage of a severance plan being discussed or put into place in case of a change of control. I wonder if you could tell us how many people that’s likely to cover and kind of what the annual cost of that group of salaries would total.

[Strauss Zelnick:]

I’ll answer the first part. It really only takes care of about 10% of the work force. The senior management was already covered by employment agreements in prior plans and the tier four employees were also covered by prior plans, so it represents about 10% of the work force and we’re not discussing an actual number. The plan, by the way, is relatively typical for the industry and relatively typical among our direct competitors.

[John Taylor:]

Right, okay. And so I assume you qualify for that by length of service kind of thing? Is that triggered by length of service with the company or is it a salary -- I mean, what’s the cut-off? How do you determine that 10%?

[Benjamin Feder:]

I think what Strauss is referring to; the plan covers the entire company. There are different tiers that we’ve outlined and the tier four tier, which is the lowest tier on the pyramid, is dependent on the number of years of service contributed to the company and your severance depends on that. Senior executives, a lot of senior executives are already covered under contracts and I think that’s what Strauss was referring to.

[Strauss Zelnick:]

I was referring to the incremental cost of the plan. Sorry about that.

[John Taylor:]

Okay, great.

[Benjamin Feder:]

And then the overall cost obviously depends on, you know, in the event of a change of control, in the event certain things happen, it’s hard to -- you know, you can model it out but there is no absolute number that I can give you today.

[John Taylor:]

Yeah, okay. All right, and then -- let me see -- do you guys have a date or can you confirm that GTA IV has gone gold at this point?

[Benjamin Feder:]

We are confirming our release date of April 29th.

[John Taylor:]

When do you expect -- or has it gone gold yet?

[Benjamin Feder:]

We don’t release that information.

[John Taylor:]

Okay. All right and then my last question, actually I have two more housekeeping. One, could you give us the inventory breakdown between publishing and distribution at the end of the quarter?

[Lainie Goldstein:]

Sure. The mix is 65% distribution and 35% publishing.

[John Taylor:]

Okay, great. And then it looks like you are combining capitalized development and license cost. I wonder if you could break those out for us long-term, current and long-term?

[Benjamin Feder:]

We don’t have -- if you want, you can follow-up with Lainie afterwards.

[John Taylor:]

Okay. Okay, good. Thank you.

[Operator:]

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

[Mike Hickey:]

Thanks for taking my question and congrats on the quarter. Curious on 2K Marin. I thought that studio was created for original IP and why Bioshock is moving to 2K Marin? And what is Ken up to? Is he still attached to that name? And then if 2K Boss in Australia are not working on Bioshock 2, obviously we’ve heard they are working on a different game. Is that something that we can model in the next year?

[Benjamin Feder:]

You know, Ken is a terrific asset in the company and he’s a brilliant game developer. We’re really excited to have him. He’s working on -- he will be working on Bioshock 2 and he will be working on the new IP. A lot of the work will be done at 2K Marin but that’s not to say Ken is not involved. We think he’s critical to Bioshock and he’s critical to new IP in the company.

[Mike Hickey:]

Okay, and then -- so then 2K Boss in Australia, they’re working on one game then with a little bit of time spent on Bioshock 2, or --

[Benjamin Feder:]

Yeah, they are working on another game.

[Mike Hickey:]

Okay. And then you said that -- I think you said pre-orders for GTA IV were a little bit elevated relative to your original expectations. Is there a catalyst in your view for that?

[Benjamin Feder:]

Look, it’s getting a lot of publicity. I couldn’t tell you what the catalyst was. We kind of see it -- we see it from preorders just on the numbers. Obviously the platforms are selling great. They seem to be resistant to any downward pressure in the market overall and I think consumers will probably tell you that they are nervous that there is not going to be enough when it comes out, but we are doing everything we can to get the game out. It’s a great game. We think it’s getting a lot of great publicity and we think it’s just selling better than expected.

[Mike Hickey:]

Okay, and when you guys modeled for your preorders, was that -- did you kind of index that against prior GTA releases and the preorders there or was that something different?

[Benjamin Feder:]

We did a lot of modeling around here. We take it from a lot of different angles. Lainie and her team are fairly sophisticated when it comes to this stuff, so we -- there’s obviously when you are in a hit-based business, there’s always a range of outcomes that you expect but -- and you know, when you have early data, a lot of the ultimate data depends on what the early data is and so the early data is positive and as a result, we think the ultimate data will be positive.

[Mike Hickey:]

Okay, and then last question on your release date for GTA IV, April 29th, not -- I can’t think of any other videogame that would compete there but certainly on the cinema side, that’s the start of the box office summer season and you have at least one tent pole coming out that weekend. Do you think that in any way kind of cramps your initial potential there or --

[Benjamin Feder:]

Not in the least. I think this is a title that stands by itself. You know, when we first moved the title out from Christmas season, the feedback that we got from the marketplace and from consumers and retail channels was that this game stands on its own. It will withstand any competition either within the videogame business or outside the videogame business.

[Mike Hickey:]

Okay. Thank you, guys.

[Operator:]

Thank you. Our next question comes from the line of Doug Creutz with Cowen & Company.

[Doug Creutz:]

Thanks. Briefly, when you guys first came in a year ago, I think one of your priorities was trying to negotiate a new contract with Rockstar and obviously that got pushed back to the GTA IV delay. Now that that’s going to be shipped soon, is that going to be pushed back up to the top of the priority list for you guys? And how does your ability to grow the business in fiscal ’09 get impacted by your ability to do or not do a deal with Rockstar? Thanks.

[Strauss Zelnick:]

Thanks for the question. I [beg] the question though because we have never commented on the internal workings of our discussions with specific employees and it just would be inappropriate and certainly we wouldn’t start today. We think we have the most talented, creative people in the business. Incidentally, we think we have the most talented business people in the business as well and when we have something to say about our ongoing relationships with certain people, we will do so.

[Benjamin Feder:]

On the topic of Rockstar, I wanted to add some information that Mike Hickey asked before, because I’m not sure it came out completely the way it should have but we are releasing additional episodic content on Grand Theft Auto IV for Xbox 360 and sequels to some of our Rockstar triple A titles and I wanted to make sure you had the correct information.

[Strauss Zelnick:]

So just to finish it off, we value the relationship with Rockstar greatly. Their creative prowess and ability and commitment, focus, and dedication is unmatched in the industry. You are going to see just one piece of evidence of that on April 29th, but that’s not the only piece of evidence. There are a lot of other great games. And then there are a lot of other great games and entertainment coming from the rest of our company as well. It’s the thing we’re most proud of. But to comment on people’s individual relationships with the company just is -- it’s never something that we’ve done and we’re not starting now.

[Doug Creutz:]

Okay. Thanks.

[Operator:]

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

[Edward Williams:]

Good afternoon. A couple of questions; first of all, can you give us an idea just to follow-on the episodic content of GTA, how we should model that out in terms of the economics around that?

[Benjamin Feder:]

You know, we haven’t really discussed pricing. We haven’t discussed downloads. We have I think -- you obviously model what you need to model, but we haven’t disclosed anything and neither has Microsoft, so I’m afraid I can’t provide any new information today.

[Edward Williams:]

Okay and looking at the headcount, can you give us an idea as to what the headcount is at the studio as well as the overall headcount?

[Lainie Goldstein:]

The total studio count is about 1,350 people right now, after the acquisition of 2K Czech, and our total headcount is about 2,100 employees.

[Edward Williams:]

Okay, and then as we look at GTA IV, what sort of a -- how should we look at the annual contribution of revenues coming in the second quarter versus the third quarter and the fourth quarter of the fiscal year? How are you thinking of it this go-round?

[Lainie Goldstein:]

We haven’t really shared our launch quantities yet and we are giving our guidance for Q2 overall, but we haven’t shared our specific numbers for Q3 and Q4 yet.

[Strauss Zelnick:]

I think we have said in the past that when it was a Christmas release, you would have expected a bulk of orders to come in a shorter period of time. We would expect it to be more extended, given that it’s not in the Christmas season.

[Benjamin Feder:]

We’re also seeing a lot of leverage in our catalog in general. That’s one of the great things about what’s going on in the business right now.

[Edward Williams:]

Okay, great. Thank you very much.

[Operator:]

Thank you. Next we have a follow-up question from John Taylor with Arcadia Investment Corporation.

[John Taylor:]

Let’s see -- I didn’t expect to get in that early. I think Edward asked that question about the economics. Since you are giving us some guidance that we are going to see revenue from the episodic, I think it would be really helpful if you could give us a couple of hints in terms of how that might hit certain line items in the fourth quarter. Because I mean -- or are you going to book the whole amount that’s in the current, or is that a 12-month thing? I mean, can you give us any way of thinking about how that chunk of revenue comes in?

[Lainie Goldstein:]

Well, we definitely plan on having one of the episodes during fiscal year 2008 in the fourth quarter and then one in fiscal 2009, and we are able to recognize the revenue as we meet our obligations, so that’s how we are going to recognize the revenue.

[John Taylor:]

So is there -- is there capitalized development cost against that that’s going to be amortized off?

[Lainie Goldstein:]

Yes.

[John Taylor:]

You can’t give us any hint though in terms of contribution margin or anything like that?

[Lainie Goldstein:]

No, we can’t.

[John Taylor:]

Okay. You might think about that, because that’s clearly going to have a pretty big impact and it would be helpful for us to know how you are thinking about that. Anyway, thanks.

[Benjamin Feder:]

Thanks for the feedback. We’ll consider it.

[John Taylor:]

Thank you.

[Operator:]

Thank you. Next we have a follow-up question from Ben Schachter with UBS Securities.

[Benjamin Schachter:]

I’m following up on JT's question about capitalized software -- how should we think about how that will decline in Q2 when the game is released?

[Lainie Goldstein:]

In Q2 it will match with the revenue as we ship the product, so it’s going to be amortized as we recognize the revenue over the life of the product.

[Benjamin Schachter:]

Do you have any sense of where you are going to end up with the capitalized software at the end -- when you report Q2?

[Lainie Goldstein:]

We have it in our overall forecast but it’s not something that we’ve shared with the public.

[Benjamin Schachter:]

And specifically on GTA IV, what percentage of the revenue and units do you think will come from the special editions, the higher price?

[Lainie Goldstein:]

It’s a pretty small amount but we haven’t shared the exact percentage yet.

[Benjamin Schachter:]

Okay, and then the last question, the music genre obviously has performed exceedingly well. The history of Rockstar and some of you folks over -- Zelnick has been in the music business. Is that a genre that you anticipate getting into on the videogame side of things?

[Benjamin Feder:]

You know, we’re a pretty creatively driven shop, Ben and the music on GTA is fantastic. There’s music in Midnight Club, which is fantastic. And we’ll continue to explore that. I think it adds a terrific game experience to the games. It’s an immersive experience. It’s an exciting and emotional experience and music is a key part of that. I don’t know that I’d call music a genre. I think it’s a part of the total experience and that’s what GTA is -- it’s one of the best gaming experiences on the planet, and so we’ll continue to explore that and the guys at Rockstar are some of the best in the business at doing that.

[Benjamin Schachter:]

And the last question on EA, just to clarify the timing around this; right now, you are not talking with the company but you’ve told them that you are willing to talk after the release of the game and that they, as far as you know, don’t want to do that and want to speak now?

[Strauss Zelnick:]

Well, no. I mean, it’s what I said at the beginning of the call -- we’ve disclosed everything. It’s all out there in the public and there’s absolutely nothing new to say.

[Benjamin Schachter:]

Okay. Thanks.

[Operator:]

Thank you. There are no further questions. I’d now like to turn the call back over to Strauss Zelnick.

[Strauss Zelnick:]

Thank you so much for joining us today. As you can imagine, we’re feeling pretty good about how things are going and we feel good about the rest of the year. Thanks so much for joining us.

[Operator:]

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.