Earnings Call: Q2 2015

Aug 27, 2015

Good day, everyone, and welcome to GameStop Corporation's 2nd Quarter 2015 Earnings Conference Call. A supplemental slide presentation is available at investor. Gamestop.com. I would like to remind you that this call is covered by the Safe Harbor disclosure contained in GameStop publication documents and is a property of GameStop. It is not for rebroadcast or use by any party without prior written consent of GameStop. At this time, I would like to turn the call over to Paul Raines, CEO of GameStop. Please go ahead. Thank you, operator, and welcome to the Q2 earnings call for GameStop. As always, we are grateful to our associates around the world for their performance and dedication to customers this quarter. They are the secret to GameStop's success. Joining me today on our call are Rob Lloyd, Chief Financial Officer Tony Bartel, Chief Operating Officer Mike Mahler, President of International Mike Hogan, Executive Vice President of Strategic Business Mike Buskey, President of U. S. Stores and Matt Hodges, our Vice President of Public and Investor Relations. We had a great quarter. Earnings per share growth was well ahead of consensus growing 41% year over year. Our earnings per share grew 41% on top of 144% growth in the last year's Q2. So comps are strong in the video game business delivering 8.1% on top of last year's 22% comp. Digital growth without FX was 17.5% and pre owned growth without FX was over 5%. Technology brands grew their store count by an impressive 182 stores now standing at 731 stores. Spring Mobile is now AT and T's largest dealer and our acquisition pipeline is full. Rob and Tony will provide color on the video game business and the Tech Brands metrics. During the quarter, we closed on our acquisition of GeekNet and the thinkgeek.com brand. We are very excited about this opportunity and have spent significant time with the GeekNet team on the integration plan. Mike Hogan will share some early color on our progress. Our collectibles or loot business had a very good quarter. What was once an experiment in Australia a little over 2 years ago has turned into a global business that is feeding rapid growth. As we see opportunities, we will continue to remodel GameStop stores to give more linear footage to loot merchandise and less to video games, providing us a great competitive lever for the video game publishers. Integration with ThinkGeek will only help this business. Mike Mahler will update you on our global progress. Last quarter's capital allocation was again disciplined as we paid our dividend of $0.36 per share and bought back $60,700,000 worth of our stock. Taking a moment to step back and look at the business, you have to recognize that we have a knack for identifying and developing opportunities in transformational technology and business acquisitions that are paying off for shareholders. Our early and rapid investments in refurbishing mobile devices has turned into our Technology Brands unit, the fastest growing AT and T and Apple dealer in America. Our ability to adapt a great idea from Australia, adjust it to American consumers and roll it quickly has turned into our strong lineup of loot and collectibles products. And our strong balance sheet allows us to capitalize on this success by rolling up great assets like GeekNet. Our GameStop Technology Institute announced in March of 2014 has developed an in store tablet that is already rolling out nationally and we have developed beacon solutions that will soon be implemented as well. Our digital solutions of DLC, Steam, Full Game Download, Kongregate and Digital Game Informer among others are continuing to grow and will provide a nice $1,000,000,000 business this year. Underpinning all of these great ideas is great execution and the PowerUp Rewards program. It is clear to us now that we are finding new uses for our brick and mortar stores as well as our websites. And behind them is probably our biggest asset, the customer data behind all our transactions. Our ability to diversify our business has been the correct strategy, building on our leadership in video games while exploiting our core to grow rapidly in digital, mobile and collectibles. In the most recent quarter alone, those new businesses accounted for almost 23% of our gross profit and we expect to see that grow. You should note that our 32.9% gross margin rate for the 2nd quarter was among the highest in our history and gross profit dollars were a company record for the Q2. Other categories like pre owned may fluctuate depending on mix and promotions, but our ability to diversify into richer lines of business and products is allowing us to increase profitability. We provided guidance for Q3 that is slightly down to modestly up and increased our full year guidance by the share count bought back in the quarter. We learned in our investor survey that setting achievable targets is important to you and expect to continue doing so. We continue to spend a lot of time internally and with our board and our strategic plan assessing the size of markets and their adjacency to our core customer base. We seek more opportunities to leverage our core competencies of real estate, human talent, capital, buy sell trade and power up rewards into attractive new segments. A high rate of change will continue to define us and will protect our family. I will now turn the call over to Rob. Thanks, Paul. Good afternoon, everyone. I'll start today by covering the highlights of our successful Q2 and then I'll dive into some color on the quarter. Overall results exceed our expectations again this quarter in terms of revenue growth, same store sales, operating margin, net income and EPS. Sales increased 1.8% in the quarter or 7.4% excluding FX. Comparable store sales increased 8.1% exceeding the high end of our guidance range by over 500 basis points. Gross margins expanded 110 basis points on the strength of growth and margin expansion in mobile and growth in collectibles, leading to record 2nd quarter gross profit of $580,500,000 Adjusted operating earnings increased over 65% for the quarter, driven by our sales growth in collectibles and margin expansion in mobile. During the quarter, we incurred one time charges of $9,100,000 primarily relating to the GeekNet acquisition and Tech Brands expansion, which included RadioShack store acquisition costs. SG and A adjusted to exclude charges as a percentage of sales was 27.3%, down slightly from 27.5% in the prior year quarter despite investments supporting Tech Brands expansion. Interest expense increased $4,500,000 due to the $350,000,000 in debt outstanding. Adjusted net income increased 34.6% and adjusted EPS increased over 40%. Foreign currency moves reduced sales nearly 100,000,000 but had minimal impact on EPS. Now let's look at sales and margin during the quarter for some of the categories. Hardware sales decreased 2.2%, but increased 3.7% excluding FX because of strong demand for the PlayStation 4 and Xbox 1. In the U. S, we sold 42% more next gen consoles than in the Q2 of 2014, leading to the outperformance in the comp results. Software sales declined 6.0%, but increased 0 point 7% excluding FX as we overcame the comparison to Watch Dogs and Mario Kart 8 from last year with strong performance on Witcher 3 and Batman: Arkham Knight. Pre owned revenue grew 0.5 or plus 5.1 percent excluding FX as we saw continued growth in next gen pre owned hardware and software. Pre owned margin rates were 46.0 percent, down 100 basis points from the prior year due to higher refurbishment costs on an increased mix of hardware and accessories trades, which were driven by the trade up campaigns we ran during the quarter. Digital receipts on a non GAAP basis grew 11.1% or 17.5 percent excluding FX to $199,000,000 for the quarter. As we said in the release, growth was led by sales of DLC for Witcher 3 and Batman: Arkham Knight. GAAP call. Mobile revenues increased 26.9%, driven by a 62.3% growth in our Technology Brands revenues and gross margins increased from 36.1% in Q2 last year to 45.4 percent. As we stated on the last call, as we continue to rapidly expand our Tech Brands footprint, there will be upfront investment costs in order to ensure successful openings. This will impact short term operating results, but will ultimately provide sustainable profits for the company. During the Q2, we invested over $5,000,000 for the 89 stores we opened and for the 90 to 100 stores to be opened during the Q3. Q2's Tech brand store growth also included the acquisition of 3 AT and T resellers totaling 93 stores, most of which were acquired at the end of July. Revenues in the other category increased 37.7 percent to 99.4 excluding FX as we continue to expand our collectibles business. Some other data points are as follows. We closed a net of 33 video game stores around the world. As Paul mentioned, we closed the acquisition of GeekNet including the ThinkGeek brands and e commerce site. The acquisition cost was $126,000,000 net of cash acquired. ThinkGeek will be accretive in the second half of the year. In the quarter, we repurchased $60,700,000 in stock or 1,410,000 shares at an average price of $43.04 We surpassed the $1,800,000,000 mark in cumulative buybacks with over 71,000,000 shares acquired at an average price of $25.28 We remain committed to our buyback program and are on track to meet our 2015 objective of repurchasing at least $200,000,000 of stock. We also paid the 2nd quarter dividend at $0.36 per share. In the last 12 months, we've generated approximately $500,000,000 in free cash flow and have returned $466,000,000 in dividends and buybacks and have used an additional $247,000,000 on acquisitions. Now let's move on to Q3 guidance. As stated in our earnings release, we expect same store sales to range from plus 1% to plus 4% and revenue growth to range from flat to positive 4%. Changes in foreign currency rates are expected to again negatively impact revenues by approximately 100,000,000 dollars when compared to the Q3 of last year. Again, this quarter, we expect monthly software results from NPD to vary dramatically. The August title lineup is lighter than last year, with Madden being the only comparison. In September, we will become congested, which is a very tough overlap as this year's version is only an expansion pack. Assassin's Creed and Halo should give us a favorable comp in October. Due to our over indexing in market share on Destiny from last year, we are expecting new software revenues to be down in the Q3. According to NPD, in the U. S, nearly 3,000,000 units of Destiny were sold across 4 platforms in the Q3 of last year. This quarter's most anticipated title is expected to be Halo 5, which launches very late in the quarter and will only be available on one platform. We also expect a slight decline in the pre owned margin rate as the mix shifts to next gen from prior gen and as we continue to invest in refurbishment of pre owned consoles to support sales growth. Our repair costs remain comparable, while pre owned hardware prices decline over time. Also, as a reminder, sales of next gen pre owned units have a lower overall margin than prior gen units due to higher trade in prices, is typical in a new console cycle. We are forecasting pre owned margin to be between 44% 46% for the balance of the year. Overall, we expect to expand gross margins compared to the prior year quarter as other areas of our business such as mobile and collectibles positively contribute to our profits. Despite the upfront investments to support store openings, which I described earlier, operating earnings for Teck Brands in the 3rd quarter are forecast to be comparable to the prior year quarter and are expected to grow significantly in the 4th quarter. We are guiding earnings per share for our Q3 to range from $0.53 to $0.60 per share. We are expecting a 37% tax rate for the quarter, which is higher than we had in the Q3 of last year and we will have approximately $0.02 per share in additional interest expense. You should model 106,700,000 shares outstanding for the 3rd quarter and 107,000,000 for the full year based on buybacks through the end of the second quarter. For the full year, total revenues are now expected to range from flat to positive 5% and same store sales are now expected to range from positive 2% to 7%. After considering buybacks we've completed thus far, we are raising our full year guidance from a range of 3.6 $3 to $3.83 per share to a higher range of $3.66 to $3.86 per share. I will now turn it over to Tony for his comments. Thanks, Rob. Our retail operations had another strong quarter as we continue to capitalize on our unique specialty service model and grow our new pre owned and digital video game business as well as our technology brands business. We believe that service matters and that our businesses are expanding because we meet the needs of our customers better than any of our competitors. In new video games, we again increased share as our U. S. Software grew 1.2% versus a decline in the overall market. Our software share increased by 1 point and we continue to sell over 1 half of all Xbox One and PS4 software. Our U. S. New hardware dollar sales grew 13.6% during the quarter versus a decline in the overall market, resulting in 4 points of hardware market share gains during the quarter. The console launch remains strong in its 22nd month as we have tripled the number of PS4 units that were sold versus the PS3 launch and have nearly doubled the Xbox 1 units versus the 3 60 launch. Our pre owned business outpaced the new business and grew during the quarter as we logged 0.5% growth after FX and 5% growth prior to the impact of FX. As is normal during this part of the launch cycle, our increasing mix of next gen sales is driving this growth. We're also in a good inventory position as our pre owned inventory dollars are up 6% over the same period last year, driven entirely by next gen hardware and software growth. So we are well poised to achieve mid single digit global pre owned growth for the full year. Looking at digital, we again drove double digit growth in non GAAP digital receipts which increased 17 point 5% before FX and 11.1% after FX. This growth was driven mainly by the increase in downloadable content that was sold new game launches. Kongregate will launch 7 new mobile games this quarter and is on track to grow mobile gaming revenues by approximately 50% for the full year. It is important to note that during the recent release of EA's Madden 16, we work with our partners to operate free physical game with the purchase of either a PS4 or Xbox 1 and did not carry the Xbox 1 digital bundle. We expect that if a game is provided as promotional item in a hardware bundle, GameStop will see more of these physical offers than digital pack ins on upcoming third party releases. In our Tech Brands segment, we continue to extend our sales leadership of AT and T and Apple's brands in a high service manner as our Technology Brands division is experiencing explosive growth. We continue to execute our strategy of rolling up smaller dealers to improve productivity and leveraging our real estate expertise and adding new locations. Our Technology Brands division has had a very productive summer, opening or acquiring 182 stores since the end of Q1. Our store count as of the end of Q2 stands at 731 stores. This represents a 1 129% increase in store count versus the end of Q2 2014. While we still plan on adding between 450 to 550 Technology Brand stores this year, the bulk of our investment spending is behind us and we anticipate seeing strong growth in the back half of the year, culminating in our Technology Brands profits growing between 40 percent 50% for the full year without infrastructure investment costs and 10% to 20% after such investment costs. This also sets us up for strong growth in 2016 and beyond. Our Spring Mobile division is now not only the largest fastest growing AT and T dealer, but they continue to be the most productive dealer as well. Jason Ellis, our Senior Vice President of Technology Brands, and his team have done a great job of growing their business while maintaining a high service standard. We are also the largest and fastest growing Apple authorized reseller and a top 5 Cricket dealer. In early August, we also began selling DIRECTV in all of our spring mobile stores, so we are now offering a full line of AT and T products and services in all of these stores. We are confident in our specialty retail expertise across all of our brands and optimistic about continued growth in the back half of the year and in 2016. Finally, we leave this weekend for our annual store managers conference in Las Vegas, which will boast approximately 6,000 leaders from all of our companies and from around the world. We will have top leaders from all of our partners talking directly with our field leaders about their newest innovations and their plans for growth. The managers will also get hands on experience on the latest innovations, most of which have never been seen by the public. This investment ensures that we will have the most knowledgeable sales team in our industries and allows us to continue to provide better service than our competition. With that, I'll turn it over to Mike Mahler. Thanks, Tony. Good afternoon, everyone. GameStop's international businesses had a strong second quarter exceeding expectations with record market share and a significant improvement in operating earnings over Q2, 2014, led by our Australian business with a 10.2% same store sales increase. Driving our increase in international earnings was digital receipt growth of 20% excluding FX, 30% e commerce growth excluding FX driven by expanding web in store sales and the continued expansion of licensed merchandise and collectibles what our customers like to call LOOT. In the Q2, LOOT was our fastest growing sales category with global sales growing by more than 200% versus prior year, increasing customer basket size and expanding our gross margin rates. This rapid growth was driven by our continued expansion of the category in GameStop stores, improved merchandising and marketing expertise in the category, developing exclusive products, leveraging recent fan events such as Comic Con and exciting As mentioned on the last earnings call, as sales have continued to climb on these new products we're increasing the space devoted to the category in all markets. Our 2nd wave of in store expansion was completed in the Q2 generating strong increases in loot sales as well as expanding our customer base and driving increased traffic in our stores. Finally, due to the success of our new standalone retail concept dedicated to LOOT, we have continued to expand the Xyng Pop Culture pilot in Australia and other markets. We ended the 2nd quarter with 14 stores in Australia and one store in Dublin. We will continue to expand this new concept in the second half of twenty fifteen in other markets, including the United States where we'll be opening our first location this fall under the brand name of ThinkGeek. Leveraging the powerful brand of our recent acquisition of GeekNet, Mike Hogan will provide more details on this new business. The expansion of this category continues to be met with very enthusiastic demand from our store associates and customers and we expect continued strong sales growth in the second half of twenty fifteen driven by many outstanding entertainment launches such as Fallout 4, Hunger Games: Mockingjay and Disney's upcoming blockbuster Star Wars Episode 7: The Force Awakens where we are seeing very strong pre orders on our exclusive loot offerings. For the year, we are targeting sales of $200,000,000 to $250,000,000 not including ThinkGeek. We are excited by this opportunity to drive continued same store sales and margin growth and increasing relevance with our customers. And we expect this category to grow to an over $500,000,000 business globally over the next 3 years. And now I will turn it over to Mike Hogan. Thanks Mike and good afternoon everyone. Paul asked me to comment briefly on our recent acquisition of ThinkGeek, our progress to date and our plans. As discussed previously, GameStop initiated a robust business development a number of years ago to facilitate our diversification efforts. We are constantly exploring new opportunities that can apply core GameStop a growing $20,000,000 worldwide category where we can leverage our core strengths to drive non gaming revenue growth and profitability. ThinkGeek provides a significant expansion of our global multi channel platform. We will utilize their product development licensing expertise to broaden our collectibles product offering and deepen our existing customer relationships while adding new ones. It is worth noting that Game Stop's global multi channel business posted 28% growth for the Q2. Multi channel is a key growth driver and we expect ThinkGeek to be a big part of continuing that growth. Although the transaction closed a mere 6 weeks ago, I'm happy to report the integration is off to a great start. We continue to see great value in this acquisition. I want to begin by sharing a few key facts regarding the GameStop and ThinQy customer base where we see significant opportunity. GameStop customers are a great fit for collectibles. In a recent survey, 67% of GameStop customers indicated they plan to purchase collectibles in the next 12 months. This is a huge opportunity for us to tap into. Our PowerUp base aligns well with the category. 45% of PowerUp members have purchased collectibles in the past 6 months as compared to only 22% for all U. S. Consumers. And we see upside for these current buyers. While PowerUp members are spending twice as much on collectibles as the average category buyer, ThinkGeek customers actually spend 4 times the average. We see significant upside for PowerUp member spending and for the category overall. ThinkGeek is a powerful brand. 46 percent of PowerUp members are already familiar with the brand, double the awareness for all consumers. And finally, consumers are extremely satisfied with ThinkGeek, giving the brand a very impressive 60 net promoter score. Now a few thoughts on synergy and the growth opportunity. On the cost side, we are already seeing supply chain and purchasing synergies, some of which will positively impact the business in the current fiscal year. GeekNet posted an $8,000,000 loss in fiscal excited about. Web traffic. We recently began highlighting a few ThinkGeek products on gamestop.com to refer traffic. GameStop is already driving greater than 10% of total ThinkGeek traffic. Profitable customers. GameStop provides a high value customer for ThinkGeek, similar to what we have done successfully for Kongregate with mobile game purchasers. As with Kongregate, we expect traffic from GameStop to convert it well above the average. Web in store. We have added a number of top selling ThinkGeek products to our GameStop Web in Store program. This allows customers in GameStop stores to order products for home delivery. We just opened this up last week and we have already sold out of several key products. Profitable promotions. GameStop and ThinkGeek collaborated to execute a 16th anniversary sale last week, which resulted in ThinkGeek's 2nd highest gross margin day this year. Pipeline, we expect significant growth in the back half of the year. We are excited about many exclusive new products, including a full lineup in support of the new Star Wars movie. International expansion. We are also excited about the potential for offering ThinkGeek products in our European stores. We have already begun shipping a limited selection for the fall. ThinkGeek products are currently available in our Australian stores as well. As Mike Mahler mentioned, we will have several ThinkGeek stores opening in the U. S. This fall and we will feature ThinkGeek heavily at our Manager's Show in Las Vegas next week. We are very pleased with the progress to date and we anticipate meeting or beating our initial synergy and growth expectations. And finally, for those of you making up your holiday gifts list early, I wanted to highlight a few unique products that ThinkGeek will be featuring over the next few months. Don't miss out on the Star Wars R2D2 Bento Box. The Death Star waffle maker is sure to be a hit or maybe a Tesla vacuum tube wristwatch or the ever popular Knight Rider kit car charger. You can all look forward to seeing one of these in your Christmas stocking. I will now turn it back over to Paul. Thank you, Mike. We will now open it up for Q and A. Operator, please proceed. We'll take our first question from Colin Sebastian from Robert Baird. Great, thanks. Good afternoon and congratulations on a very nice quarter. Thank you, Tyler. Thanks. Paul, first, I wonder if you could add some color on the plan to reconfigure the stores, reduce the size of the video game category and how you manage that change including timing? And then secondly, looking back at the Q2 numbers, I mean, clearly you saw strength in the mobile and consumer electronics segments. Video game products declined a little bit. I wonder if you're seeing any impact there from full game downloads. And then lastly, in terms of the outlook for the remainder of the year, if you could maybe talk about some of the titles where you're perhaps seeing some particular strength in preorders, that would be helpful. Thank you. Thanks, Colin. Let me start and handle the first and maybe Tony and Rob, you 2 guys think about 23 on what you think. I think Colin, the way we see it, this loop thing, we've been researching it, Mahler and the team in Australia has been researching it for a couple of years. It hasn't been a sudden event. What we see though is that there's a tremendous adjacency between popular culture and video game. And if you remember back to our franchise marketing efforts that we did a few years ago, we know that when the consumer is at a launch, they want to get every kind of item they can related to that particular title. If you're in line for Batman, you want the Batman T shirt, the game, the everything that there is. And of course, there's always been a lack of that merchandise. So we believe that the loot has a significant place in our stores. Even if I was here today, Mike Buskey is here, our store leader. Mike, I think what are you at 20% overall loot space, probably growing? Yes, yes. It's going to be a bigger part of our business. We believe it's a good investment in space. And candidly it gives us good leverage with publishers who haven't had that kind of competition before. So I think that's a good use of our space. And as long as it's productive, I think we should continue to do so. What about mobile consumer full game downloads? Who wants to take that one? Well, yes. So Colin, it sounded like you said the video game products were down. I want to correct that and say that before the impact of FX, hardware was up, software was up, pre owned was up, accessories were up and digital was up. So we're very pleased with what we saw in the quarter in the core video game business. I think I'll turn it over to Tony for any specifics on what we saw on the digital side. Sure. And we continue to attach at a very high rate. For instance, in Madden that just launched, we had a 42% attach rate of digital to that title. So we have a very strong attach rate and we continue to be It's very high. Very high. And we continue to be very good at letting people understand exactly what they can buy on a from a digital standpoint. Remember, the digital always suffers from 2 things, discoverability and affordability, and we do a great job on both of those fronts. In terms of the games that we're very excited about, it's really the new some of the new IP or at least IP that hasn't been out for a little while. Halo 5 is launching, as Rob talked about. It's going to be stronger in the Q4 than it is in the Q3 because it launched so late in our Q3. Call of Duty: Black Ops III, we're excited to see the 3 year development cycle and so very excited about that game coming out. And Fallout 4, which is announced, is also a game that we're these new titles. And that's why Rob, I think, shared his enthusiasm around the Q4 growth. Thanks, Colin. Thanks. See you next week. We'll see you then. See you there. We'll go next to Brian Nagel with Oppenheimer. Good afternoon. Congrats on a nice quarter. Thanks, Brian. A couple of questions. First off, maybe a similar follow-up to the prior question. On software, there was some noise there. As we look at that year on year growth with given the currency fluctuations and then some of the comparisons with last launches. But overall, as we step back from that and you look at the underlying trends there, how would you characterize the underlying software sales trend, particularly with respect to the new generation sales versus current and prior generation sales? And then I'll have a follow-up question. Tony, you want to take that one? Sure. Well, given that the launch has been incredibly strong, we see them as definitely participating in that. Now clearly, we've talked about attach rates are a bit lower. And when you take a look at our attach rates on this incredible launch cycle that we have, when you look at our physical and our digital attach rates together, we're very consistent with the prior launch. So when you think about the fact that we've tripled the amount of units that we sold on the PS4 and almost doubled the Xbox 1, you see that we have a very strong we feel very good about the growth that we're seeing. Mike, anything you want to say on international unit growth pre FX versus? I think what we're seeing is pretty strong software growth on new releases especially new IP. We talked about that a little bit on the call. And so when we look at reservations for the big titles this fall, we're continuing to see that trend where some of the new IP that's coming out to the new gens has really got a lot of customer excitement around it. So I thought you'd given us in the past the actual the new year on year growth in new generation software towers. That something and if you had, can you what was that number here in Q2? The number in Q2 was 64%. This is U. S. Numbers. So 64% for the PS4 and Xbox 1 and down 56% on the PS3 and Xbox 360. So clearly, the one thing that is different in this launch cycle versus the other is the fact that PS3 and Xbox 360 have fallen off faster, and we've said that multiple times. And so what we're seeing is very robust sales of PS4 and Xbox 1 offset by accelerated decline in PS3 and Xbox 360 on the new side. Now the pre owned side is obviously outperforming that, which is why we actually grew faster than new this year this quarter. Then the other question with respect to guidance. And Paul, I heard your comments earlier and you've made those comments before about wanting to put numbers out there that are achievable. But you beat the EPS beat the midpoint of your guidance here by $0.08 and you're lifting your the range both the top and bottom end by $0.03 So there's $0.05 that goes away there. Is that simply GameStop wanting to be conservative or should we read something else into that? I wouldn't read anything else into it. I'll let Rob answer the meat of the question. Here's a couple of things. There's what 75% of the year is left. A lot can happen in the rest of the year, we don't know. And number 2, you told us, investors told us in the surveys that we've done that you want us to set targets we can achieve. So we're trying to set those targets. Rob, what else would you say about it? The point I was going to make was that we're only onefour of the way through the earnings for the year, and there is a lot to be learned from the titles as they come out this fall. And so we're a little cautious there. Yes. I think if what you're worried about is there a looming digital scenario out there, I would say not one that we know about, that's for sure. But we're just trying to be cautious and trying to manage expectations and serve our shareholders. Well, thank you and congrats again. Thank you. Thank you. We'll go next to Arvind Bhatia from Stern AG. Hi, Arvind. Let's go to Mike Olson with Piper Jaffray. Okay. Hi, Mike. Hey, guys. Good afternoon. Thank you. I just had a couple of questions. If you look at the collectibles, which is obviously doing well, growing fast, if you look at that in isolation, is the gross margin for collectibles higher than your broader video game business, including software and new hardware and pre owned? In other words, if collectibles continues to grow, is that a favorable long term trend for gross margin or not? And then my other question was, last quarter you mentioned that pre owned growth would accelerate throughout the year and end up out pacing new software growth by the end of the year? It sounds like that's still the case, but just wanted to check back on that. Mike, this is Rob. The collectibles category is margin accretive for us on the overall business. So we're very pleased with that and expanding that obviously will be beneficial to margin as we go forward. In terms of the pre owned growth guidance relative to new, I think we said both would be mid single digits growth for the year. Okay. Thanks very much. Thank you, Mike. And now we'll go to Arvind Bhatia from Stern AG. Okay. Sorry about that guys. Congratulations to my side as well. Okay. So I guess everybody is trying to figure out the back half. Looks like you guys are talking about acceleration. You got a great lineup. Just wondering if you would maybe quantify as more on the new software side. I think I remember previously you guys have talked about mid single digit growth in new software as well. I think you confirmed used, but I just want to be sure you're still comfortable with the mid single digit growth number, ex FX, of course. That's my first question. And then on the used category, I heard you talk about the extra refurbishment costs related to the hardware side and also how the next gen category had slightly lower margins. And so just your back half guidance on gross margins, I got that. But how should we think about used margins, say for 2016 on sort of go forward basis? Rod, do you want to take the software question? Sure. With respect to new software for the year, we're saying mid single digits. I will clarify that with continued FX movement, we're saying mid single digits growth for software, new software and pre owned before considering currency. On the refurb costs, looking forward and the next gen versus prior gen, I think the point that I would make there is we're not yet ready to give guidance for 2016, but what you can directionally expect as we move through a cycle is the titles within the next gen age and that gives us greater flexibility with respect to the buy price as well as the retail prices. Okay. And then I missed the part, I think Tony, you mentioned on the Madden bundle, something about the physical bundle was there, but not the digital bundle. Can you clarify that again, please? Sure. We worked with our partners. Clearly, what is what took place last year where there were a lot of hardware promotional offers that were given where there was a packed in digital game and it was packed in for free. I think we articulated in the Q1 that we have made it clear with our publishing partners that our preference is that we sell, obviously, GameStop's preference is we sell things at full price and provide great value for our trade program and that we have physical disc. And so we work with our partners that there was a channel wide offer that had, again, a digital pack in it of Madden, and we work with both Sony, Microsoft and EA with all 3 of them and we offered a free physical disc when you bought either a PS4 or an Xbox 1. That's a clarification I was making. And then I said that if in fact these do continue, the platform holders do continue to put in free games as promotional items, we anticipate that at GameStop, you will see more physical bundles from 3rd parties as opposed to digital bundles. And Arvind, this digital, of course, we've had lots of conversations on these digital bundles and so forth, right Tony? But I think what's interesting to us is that consumers have a pretty strong preference in this and I think we've seen this play out in a variety of ways over the past few years. Consumers prefer those physical bundles because they know that that disc has value in the trade in program at GameStop. So we choose not to participate in the digital bundles. And Tony creates these promotions with Bob Koozan that are very effective. And it did not hurt our market share. We actually increased market share on the launch. Yes. Got it. Just one last one. The margins on mobile consumer Electronics is up significantly, I think 900 basis points. Did you talk about kind of what drove that this quarter? I don't think we did, did we Rod? Well, the driver for that is within the Tech Brands businesses. As we continue to grow the AT and T branded store count and those businesses mature, we're continuing to see rich margins in there that stem from consumers shift to the next program from AT and T. So we're very pleased with the margin rates and the impact that that's having on the mobile category as well as the business as a whole. Okay, great. Thank you guys and good luck for the rest of the year. Thank you, Arvind. We're going to see you this weekend, Arvind or no? Absolutely, yes. All right, good. See you there. We'll go to Curtis Nagle with Bank of America. Great. Thanks very much for taking the call and good afternoon. I guess just the first question in terms of looking at the software guidance for 2,000 for 3Q, are you guys factoring Metal Gear Solid in any way in there just given that it's getting pretty phenomenal reviews and it's a pretty established franchise, I'd imagine it's going to be a pretty good game for you. And then just a quick follow-up. Yes, we are factoring that in and excited about it. It should be noted also, Rainbow 6 did move out of the quarter as well. So we were excited about both of those titles. And so you had you see that as a trade off. Okay. And then just a quick follow-up. Just going back to the used, so I understand that was driven by Next Gen, but could any of it also have been driven by the fact that the title lineup for this quarter was a little light and maybe had some people, I guess, value based gamer shifting into use as a consequence? Yes. I think as Rob shared, a lot of that I where you saw that Curtis was in our strong hardware performance and accessory performance. That's exactly what you saw as you saw more people skewing our pre owned business towards the hardware side. And as Rob talked about, we have refurb costs, which are typically the same year over year at a slightly lower retail. Okay. Thanks very much and good luck for the rest of the year. Thank you, Curtis. Go to David Magee with SunTrust. Yes. Hey, guys. Good afternoon. Hey, David. Hey, just a couple of questions. One is given the strength in the hardware cycle thus far, what's your current thinking with regard to the duration of the cycle? How it sort of plays out the next couple of years? And also any color about the tie ratios as well would be helpful. Thank you. That's a great question. Perfect question. Hardware strength and how long I mean, it's an interesting question, right, because we've obviously accelerated, brought forward a bunch of demand. Question he's got is how long will this last? Well, we see it continuing. I mean, it continues to grow in strength. And I shared earlier about tie ratio that when you combine our physical tie ratio and our digital tie ratio that were fairly comparable to the prior launch. And we have tremendous strength as we talked about. Now what's happening is now we're selling the 1 terabyte hardware, which is creating additional demand. So we see continued demand. Mike, you might want to share some of the PowerUp Rewards numbers on continued demand, Probably the best indicator we have. Sure. Yes, I would say, number 1, we're still pretty early in the cycle. The last one have gone, what, 7 years in most cases and we're barely 2 years into it. I think we're seeing an acceleration on the software side in terms of as the installed base is growing, you're seeing more and more new IP coming out. And then on the PowerUp side, one of the things we continue to track is PowerUp members' interest purchasing new hardware, and those numbers are still very strong and similar to what we've reported in the past. So all of our indicators are positive The consumers are still very excited about these products, and there's a ton of consumers out there who still want these new consoles, who haven't bought them or haven't been able to afford them yet. And remember that some of the strongest multiplayer games are ahead of us. So Black Ops III, when you look at Battlefront, Star Wars, those are incredible multiplayer games and that is going to drive whole guilds to go and migrate to a new platform. So we see that really has not started to take place in earnest yet, and we think this fall that will start to take place in earnest. And then secondly, can you talk about the breakdown in the pre owned business between what we consider a traditional pre owned product versus the newer value product? We had $41,000,000 worth of value product this quarter, which was an increase over last year that we had. So it continues to drive that. That's what our purchases were for the quarter. And so we continue to increase value offerings as well. So that contributed to some of our growth as well. I haven't checked the goal, David, of the value. If you remember, value production, I think it was in our March call last year, right? The goal of the value product was to increase our market share entitled below $20 That's our traditional weakness on the new software side. I think we did that in the first quarter. Q2, I'm ashamed to say I haven't checked, but I suspect we probably increased that. It has not been as fast as we had hoped and that's partly because we're just struggling to get to some of those publishers. On the other hand, there's a lot of activity in that space by us intent on purchasing more value products. So I think you'll see more on that. Okay, great. Thanks, Paul, and good luck. Yes, thank you. We have time for 2 more questions. We'll go next to Seth Sigman from Credit Suisse. Great. Thanks very much. Nice quarter, guys. Thank you, Seth. A couple of quick follow-up questions here. First on the Tech brand business, just wondering if you could talk about how those stores are comping those that have been open for 12 months or however you disclose it? And then also the operating earnings performance of that business this quarter, I think you gave us revenue, but I'm not sure if I heard the actual operating earnings. Guys, what can we disclose on that? We got to be careful here. In terms of the revenue performance on a per store basis, Seth, we it is not included in comp number. And the reason for that is because historically, the wireless retail business subject to a lot of volatility that's driven by changes in the commission and compensation structures that the carriers put in. We did a little bit of research, as we said before, in terms of what companies were public in this space. I think there aren't any left. They've been acquired. And the practice is to not disclose those comps, rather to talk in terms of for us, the growth and profitability and growth in the store base, I think, is a significant thing. Not sure we disclosed the operating earnings number for the quarter. And I don't have that immediately in front of me, so we'll have to get back to you on that. I mean, I think the thing you got to understand is we got partners there who have rules about what they want to disclose. The mobile segment though, I think a good proxy for, of course, we don't have operating margin growth now in the mobile. That will be in our 10 Q, Seth. I apologize for not having that. Okay. No, fair enough. I mean, clearly that part of the business is in investment mode. We saw that last quarter and again this quarter. How do you think about the normalized operating margins for that business and when that will actually start to inflect positively following this investment period? Well, as Tony and I both mentioned in slightly different ways in our scripts, we expect the 3rd quarter profit to be comparable to last year's operating earnings for Tech Brands. We will continue as we're opening 90 to 100 stores this quarter to incur some of those infrastructure costs to prepare for those openings. But in the Q4, we think we're going to be largely past that and we expect that the profit will grow significantly from last year. I think Tony said, ex those infrastructure investments, we would expect the Tech Brands profit for the year to be 40% to 50% up from last year. In terms of operating profit margins, Rob, you may want to give them the long term forecast that we provided investors before for Tech Brands? Yes. That is we don't I don't have that slide in front of me, but if I remember correctly, it was approximately 170,000,000 dollars in operating earnings against revenue base of about 1,500,000,000 of 10% operating margin in that space. Which would be accruing to us. Obviously, yes. Traditional operating margins. Okay, got it. And then just a follow-up question on the used game business. I think earlier you disclosed kind of a breakdown between current and last gen performance for the new software business. Last quarter you talked about that for the pre owned business. Just wondering if you could give us some color on that this quarter? Sure. There's a slide on this one, by the way, Seth. Actually, I don't know. Sorry. Last quarter. Yes, 64% new Yes, 64% new software growth on PS4 and Xbox 1, 117% pre owned software growth. So significantly increased there. And then on Xbox 360 and PS3, as I shared earlier, new software was down 56 percent, pre owned software was only down 25%. So we continue to see outpacing and a less decline in the pre owned section than we do in the new. Okay. And just one follow-up, if I may, on the pre owned business. You know, GameStop put out a survey this quarter, in a press release discussing how consumers were leaving some money on the table by not trading more games in. What's the company doing to stimulate that trade? And is increasing the trade in values one option to sweeten the deal and drive that trade? Sure it is. I mean, I think Tony had in his script, our inventory level and trades gone up, right? Yes, inventory level is very strong, up 6% and we've done that without having to pay more for the game. So that's been obviously, that's been a good opportunity for us. It is a constant awareness game. And that's where PowerUp Rewards is helpful and so forth. And part of the survey, to be candid, was allow people to understand that. If you go into our stores today, you will find that we've just kicked off another Trade More, Save More campaign, where each store will have the top trader of the week listed, where there will be top trade values listed. So I think this is a blocking and tackling issue in our stores where we will constantly be working to educate the customer on the great trade values that we have. The issue is the debate here around here if you sat if you're in our offices every day, the constant debate is trade values versus new launches that drive trades versus marketing. It's kind of the big three. And what we found and we can get proven wrong, what we found is big launches and in store execution drives trades more than trade value. Mike, you want to? Yes, I would just add to that from a consumer standpoint, to Paul's point, it's value and awareness. We made a huge step last year with our simplified trade pricing. And what we found is that consumers responded extremely well to that. And with a lesser mix of promotion and a greater mix of everyday value, people really responded well to that. And then the other thing we find is that trade awareness is still always an opportunity. And every time we have an opportunity, we want to communicate that. And every time we communicate that, we bring new people in. And all the evidence we have suggests that when we make people aware of the trade values and what they can get, they respond very positively to it. So we'll continue to work on awareness. Okay. Thank you for all the color. Appreciate it. We'll go next to Scott Tillman from B. Riley. Thanks. Good afternoon. Hey, Scott. Joe, I just have a few, I hope, relatively quick questions. First off, on the collectibles side, as you gear up in that category and have a little bit of history with it, do you expect it to ultimately be lumpier than new content sales? Or do you think you have an opportunity to provide some smoothing of the revenue with merchandising within the category? Yes. This is Mike Waller. I think that what we'll see because it's a broader range of IP, we will see it to be smoother. So you're consistently having new movies, new television shows and video game launches throughout the year. And so for example, the movie launches in the summer, there's frequently not a lot of new releases on video games, but there's a lot of loot you can sell with that new IP. So it seems like it'll be more consistently strong. I think the fact that you're seeing us outperform in the second quarter indicates how the loot is really contributing to balancing our demand flow. And as Mike said, there's a lot of IP that's not video games. So it should. Right. And I assume that you will be following up with marketing support behind that as the collection grows. Absolutely. Hope so. I'm looking at Hogan. He's shaking his head. I can't. I'm nodding it. He doesn't have a big checkbook, but you're nodding. 2nd on international, I missed a couple of comments. I know Australia was up over 10% on a comparable basis. And if I heard that correctly, that means the other markets, Europe and Canada, were down. I was wondering if you could compare and contrast a little bit what you're seeing on the across the international geographies. You want to take that, Mike? Sure. Just a second. Yes. I'll go ahead and give the comps. The Canadian comp was 8.5%, and we worked down comp in Europe 3.8%. As far as color, I'll turn it over to Mike. Yes. I think the color would be our 2 strongest markets have been Australia and Canada. In Europe last year, we had very good hardware allocations and Europe really exceeded the rest of the international markets in terms of hardware sales. This year we're back to our normal closer to our normal market size in hardware. And so that was a little bit of headwind for them. One thing to add Mike maybe might be that the concept of loot appears to be more of an Anglo, maybe Northern European concept. Southern Europe, we haven't seen the kind of results we've seen maybe in some of the Northern European markets. Yes, that's true. The growth of Lute in Australia, Canada, the United States, Northern Europe, the Nordics and Ireland have been consistently ahead of what we've seen in Southern Europe. And so that's something we continue to have to explore. We may not have the right assortment yet. That's one possibility or but we certainly have work to do. That's helpful. The last question I have, just in terms of the competitive environment, you've had some smaller regional players pull out of the category. It seems like some of the big boxes even have diminished the importance of CE as a leading or as a leading category or a traffic driver. But I'm curious what your take is on the competitive environment, both domestically and abroad? For video games or loot or For the broader product mix. Yes. I'll let these guys add to their comments. We've been watching all these players around the globe for a long time. And I can't say I've seen much diminishing of anything they're doing. I mean they're all running their play. That's why I did have a good number yesterday. It appears I haven't seen the video game comps. I haven't seen it Tony, but I'd be surprised if they really gained a ton of share. But we don't see a huge amount of activity. Our competitor base is so broad now too. Used to be we'd get on a call and we talked about Walmart and Best Buy and Media Mart and Sator and JB Hi Fi, Amazon. Today, we talk about lots and lots of other people, digital players, publishers who are trying to direct versus through retail. And So I have not seen a ton of activity here that's new other than the players. Yes, I don't see a lot of change in Xfinity. I think that there is a we continue to gain market share. And so like we say, quarter in and quarter out, we're selling over 1 half of the games. We may we have made a very distinct effort to try and win this tons of launch. We've been very clear about that for the last 2 years, and I think we've been effective in that. So I'm sure that there are people at some of those other locations that Paul mentioned that are seeing a significant reduction. I mean, the whole category has not tripled the sales of PS3s and the whole category has not nearly doubled Xbox 1. So clearly, we've taken a lot of share from a lot of those other people. So I don't think that they're trying less. I just think that we're running our play and it seems to be working. On the guys, we should talk about on the mobile boot side, there's a whole new cast partnership with them. We compete directly with Verizon, Sprint and T Mobile. And we sort of live and die by those fortunes. On the loot side, there's probably a lot of players on the loot side. I don't have share data LOOT, unfortunately. But I suspect we're growing very fast on the share data on LOOT. Paul, to your point, I assume installment billing is actually a benefit to you given that some of the others out there competing can offer it? Yes, yes. I think that's accurate. That's accurate. And there's just a lot going on under one roof. Don't forget, we also offer Cricket in 2,000 stores or so. In 2,000 so 2,000 GameStop stores, we will sell you a cricket prepaid phone and a contract. So when you can do prepaid phones in the store, you can probably do some other prepaid things. So we're exploring that very aggressively. It's just a lot as I said in my notes, I mean, there's just a lot going on here and we don't have the luxury of slowing down. Maybe today it feels less scary, but there was a time here where we were coming in every day, figuring out how we're going to get through the day and so forth. Today, fortunately, I think we're past that, but it's we can't slow down. So Okay. Well, thank you for taking the questions. Okay. Thank you. All right. Well, thank you for your support at GameStop, and we look forward to talking to everyone. If you're coming to our show next week, we'll see you there. And if not, we'll talk to you during the quarter. Thank you. This does conclude today's conference. We thank you