Earnings Call: Q1 2014

May 22, 2014

Good afternoon. Welcome to GameStop Corporation's First Quarter 2014 Earnings Conference Call. At the conclusion of the announcement, a question and answer session will be conducted electronically. I would like to remind you that this call is covered by the Safe Harbor disclosure contained in GameStop's public documents and is the property of GameStop. It is not for rebroadcast or use by any other party without the prior written consent of GameStop. At this time, I'd like to turn the call over to Paul Reins, Chief Officer of GameStop Corporation. Please go ahead, sir. Thank you, operator, and welcome to GameStop's 1st quarter earnings call. As is customary on our calls, we start by thanking our associates around the world for their extraordinary service and commitment to our customers during this quarter. Whether they are at a GameStop, EB Games or Micromania store, our congregate.com, game dot com or bymytronics.com websites or our Game Informer Magazine, our employees are the authorities in the video game industry. In the technology brand space, our Spring Mobile AT and T dealer stores, our Simply Mac Apple dealer stores and our Cricket prepaid phone stores all lead the way in their respective categories on customer service. Thanks to all of you and our support center associates for another quarter of protecting the family. Joining me today on our call are Rob Lloyd, Chief Financial Officer Tony Bartel, President Mike Hogan, our EVP of Strategic Business and Matt Hodges, our Vice President of Public and Investor Relations. Mike Mahler, our EVP of International Business is traveling in Europe today at a business review. We are pleased with our financial and operational results in the Q1 and believe that they demonstrate our strategy is working to maximize our position as the world's largest video game retailer as the video game category enters a growth phase, while at the same time pursuing and integrating new opportunities in the technology space that are accretive to our top and bottom line. We delivered our 3rd consecutive quarter of positive comps at 5.8% with total sales growth of 7%. Margins expanded again by 40 basis points to 31.4%, thanks to strength in pre owned value gaming and technology brands. This quarter's gross margin rate is a 1st quarter record high for GameStop. We are excited about our continuing leading share in hardware sales as we believe that console sales will drive share in the future On the pre owned value side, we had strong gross margin performance with excellent growth as the expected console cycle effect begins to take hold. Our value initiative while still in the early stage is succeeding as we sourced over $20,000,000 in product from publishers and manufacturers to drive value product. As expected, console software declined year over year continuing the cycle of prior gen declines while next gen software grows aggressively. If you look at the titles we already know about like Destiny, Assassin's Creed, Call of Duty, Pokemon and Dragon Age, it will be a big second half for software. Add to that the rapid growth in the next gen installed base that will be looking for games to play on their new consoles. Drilling down on the digital category, we delivered $190,000,000 of digital receipts in the quarter, a growth rate of 9.5%. Digital receipts are becoming a meaningful part of our business as this quarter's digital receipts equal about a third of our physical software sales. The growth of digital gaming is very good for GameStop and many investors have asked why that would be the case. The reasons are not straightforward, but revolve around our deep knowledge of the gaming consumer. 1st, digital content like other entertainment is sold mostly through a launch process and is frequently attached to a physical console launch. If you look at the growth of downloadable content in gaming, most of the growth has come through attached to titles and consoles at launch, a process that GameStop effectively invented. 2nd, gamers use trade credits to buy digital content just like physical content. And buying games online means giving up trades as a currency, a choice few gamers are willing to make. Lastly, the in store environment facilitates the community of gamers in engaging each other and learning about content and buying from GameStop earns PowerUp Rewards points for the digital purchase. Tony Bartel will give you more color on how GameStop is not only participating in digital sales, but is in fact an industry leader in digital growth with high market share. On the international front, we had comps of 6.2% with strong hardware sales in spite of allocated product in some markets. Australia led the way with 14.3% comps and strong used growth at 11.9% with strong margins. We continue to see consistent execution on fundamentals in our international business. International multi channel sales grew 42% in the Q1 and we continue to see great growth in digital sales across those markets. Loyalty membership internationally surpassed 9,000,000 members during the quarter, as we launched our program in Sweden, Denmark, Norway and Finland, the winning GameStop formula of a strong in store and online experience, exclusive product and buy sell trade of games and devices is working. Many investors have also asked why the mobile category is a good opportunity for GameStop. In our recent Investor Day, we pointed out that our 5 competencies of real estate, human capital, buy sell trade, PowerUp Rewards and financial strength are transferable to other concepts. We now have proof points from the Q1. As an exclusive dealer of AT and T, Apple and Cricket, we bring a higher level of execution to dealer networks that are highly fragmented. Our partners are willing to invest in large categories with significant technology innovation that needs distribution through specialty retail channels. We have acquired 12 dealers from September to April of this year and have many opportunities. Lastly, as our results from the Q1 demonstrate, these business units are accretive to our margins. During the Q1, the Technology Brands unit reported 60 point $2,000,000 of sales $6,000,000 of operating profit, representing 6% of total operating profit. We added 52 stores during the Q1 and expect to acquire or build 300 to 400 stores during 2014. As an example of the value we are creating, let's look at buy sell trade of mobile devices. We now have a circle of life in the mobile category that is large and growing. Customers come into GameStop, Spring AT and T stores, Simply Mac stores and stores center and sell refurbished phones in our GameStop and Cricket stores and wholesale them through our Bymytronics marketplace. As an example, trades received last week at Technology Brand Stores represented over 30% of our total phone trades, while refurbished phones represented 22% activations at our Cricket stores for the quarter. Moving on to multi channel. Our results continue to be impressive as we grew 1 103% in sales and 149% in net income in the Q1. Our mobile app has over 4,000,000 installs and those users spend more, trade more and are our most engaged customers. PowerUp Rewards has nearly 28,000,000 members in the U. S. With over 37,000,000 worldwide. Mike Hogan will give you more color on our unique approach and strong results in multi channel and PowerUp Rewards. Capital allocation was consistent and predictable during the quarter as we paid out $38,000,000 in dividends and bought back $52,000,000 worth of our shares. Since inception, we have increased our dividend three times and have bought back over $1,400,000,000 in shares. We continue to believe in capital discipline. As we look forward to E3, we believe it will be an exciting show. We expect to hear about great innovations and see new IP that will drive our industry for many years to come. As always, thoughtful investors will recognize the strong position that GameStop holds in a growing gaming industry and the unique model that we have built and are using to expand opportunities to increase shareholder value. I will now turn the call over to Rob Lloyd. Thank you, Paul. Good afternoon. Let me start by providing some color on our Q1 results. As Paul said, we were very pleased with the quarter, particularly with the continued strong demand for new video game consoles, solid pre owned growth and meaningful contribution from our Technology Brands business. Earnings per share grew 28% to $0.59 Net income grew 25 percent to $68,000,000 Technology Brands added $60,000,000 in sales, very strong margins and $6,000,000 in operating earnings for the quarter. Consolidated global sales were 2,000,000,000 dollars a 7% increase from last year's Q1 with mentioned positive 6.2% internationally. Of the 7% increase in overall sales, 3% was due to technology brands. Our hardware sales increased 81%, while the U. S. Market increased 62%. We were pleased with our sell through of next gen hardware during the quarter and continued to have strong share on the new consoles. We believe that strong new hardware sales will translate into future positive new software growth. New software sales declined 20.4%, slightly higher than the 18 percent decrease in the U. S. Market. While we achieved our typical launch market share of approximately 60 plus quarter of last year. Tony will give you added color on how we see sales of titles for the new consoles for the rest of 2014. Pre owned sales during the quarter grew 5.3%. Mike Hogan will have more color around the pre owned and value business. Accessories grew 14.8% on the strength of hardware sales. Our GAAP digital revenues were flat compared to last year's quarter at $56,000,000 Our non GAAP digital receipts totaled $189,700,000 an increase of 9.5% over the Q1 of 2013. Digital growth was driven by digital currency and strong PC digital sales in our international markets. Mobile and Consumer Electronics revenues grew to 102,200,000 dollars over 100 percent growth and included $60,200,000 from Technology Brand. The other category declined 19 point 2% from the Q1 of last year due to declines in sales of PC Entertainment Software. Gross margins for the quarter were 31.4 percent with a 40 basis point improvement from the prior year quarter. The increase was due to expansion in the pre owned margin rate and higher than anticipated margins achieved in our Technology Brands businesses due to strong wireless promotions. Gross margins on hardware were 10.2%. Software gross margins were 22.7% and accessory margins were 37.9%, all of which are in line with the guidance we gave on our Investor Day. Among the highlights during the quarter was the gross margin on pre owned and value at 49.5%. We recently guided to a new high for this category at 48%. However, for the Q1, our entry into the value category is just beginning and had minimal impact. We were able to achieve the 49.5 percent margin due to the improvement in margins that comes as consoles age. The PlayStation 4 and Xbox 1 do not have enough pre owned volume yet to impact the rate for the pre owned and value category. Digital gross margin dollars and rates were both comparable to the prior year quarter and were impacted slightly by the mix of underlying products. The gross margin in the mobile and consumer electronics category was 36.2% with gross profit of $37,000,000 up from $12,600,000 in the Q1 of last year. This was driven by results in the Spring Mobile stores. Total SG and A expense dollars increased 7.1% compared to Q1 of 2013, due primarily to the addition of Technology Brands. SG and A held steady as a percent of sales. We leveraged the increase in sales in the video game brand segments and this leverage was offset by the SG and A within Tech Brands, which runs higher than the video game business as a percentage of sales. Depreciation and amortization was about 6% less than last year. Operating margin was in line with our guidance range at 5.3%. Operating margins on to $0.59 We ended the quarter with 6,680 stores, 4,215 U. S. Video game stores, 2,195 International Video Game Stores and 270 Technology Brand Stores. We acquired 36 Technology Brand Stores during the quarter and opened 16 more. We opened 6 video game stores and closed 40 in the U. S. And opened 5 and closed 18 internationally. Inventory was up $88,000,000 from the end of the Q1 last year due to new console inventory and inventory in the Technology Brand stores. Our AP leverage increased as the growth in inventory was due largely to new console product. Now let's cover our capital allocation for the quarter. As you know, we increased the dividend 20% in March and used $38,000,000 on dividend payments. As we indicated in the earnings release, our Board of Directors authorized a dividend of $0.33 per share for the Q2 to be paid on June 17. As we reported, we repurchased just over 1,300,000 shares at an average of $39.28 for a total of 52,200,000 We have approximately $400,000,000 remaining on our current buyback authorization. Both dividends and buybacks remain an important part of our capital allocation strategy. Now for the 2nd quarter outlook. We forecast same store sales to range from positive 12% to positive 19%. We expect revenues to increase between 14% 22%. The Q2 is the lowest volume quarter of the year for video games, so the rapidly growing revenues from technology brands will have a larger impact on the gap between comp growth and revenue growth. We expect diluted earnings per share to range from $0.12 to 0.20 dollars As always, earnings guidance does not include the effect of additional buybacks. Now I'd like to spend some time discussing how we have modeled the impact of Technology Brands on the future value of the company. I discussed this in my remarks on Investor Day last month, but I think it bears repeating today. In order to make sure that our investments in Technology Brands would drive shareholder returns, we model our future results in 2 ways: with Tech Brands and without Tech Brands. As we have for many years, we have a future forecast for our video game business. We model what future returns look like for our video games business with various growth and profitability assumptions and assuming the return of 100% of free cash flow to shareholders. We model future return on invested capital. And as I've mentioned previously, we use a dividend discount model and a free cash flow to equity model to inform our buyback decision. We also model these same things with Technology Brands in the mix. In order to give you a sense of the projected impact that Technology Brands could have, here are some statistics. The present value of our future cash flow streams with Technology Brands provides a 30% premium over just the video game business. ROIC with Technology Brands begins to be accretive year. The projected premium on ROIC with Technology Brands grows from approximately 300 basis points in year 5 to approximately 500 basis points I mean sorry, 300 basis points in year 3 to approximately 500 basis points in year 5. Hopefully, this helps with the reasons why we believe investing in Technology Brands drives shareholders' returns. The contribution from Tech Brands in the Q1 at 6% of operating income should also provide some indication of the potential of this business. Now I'll turn it over to Tony for his comments. Thank you, Rob. As we said at our recent Investor Day, GameStop is laser focused on maximizing this console launch. Our publisher partnerships are stronger than they have ever been and we are adding proprietary training programs to our unique buy sell trade and power up award programs to offer consumers unprecedented value in gaming insight. In our 1st full quarter after the launch of both consoles, our optimism about the new console demand remains high and we are well positioned to take advantage of strong consumer demand. Our knowledgeable and passionate associates have the best training in the industry and are focused on driving leading market share for hardware as well as the more profitable software accessories and digital sales. From an industry perspective, the new console launches are starting off at a faster pace compared to the previous console launch. According to NPD, the 1st 6 months hardware unit sales of the PS4 and Xbox 1 are 100 and 7% higher than the previous generation. New console software unit growth is up 45%, accessories are flat and digital sales are fully incremental. GameStop managed to eclipse that performance with 6 month hardware unit sales growth over last generation of 182%. Software unit growth is 113% and accessories are up 48%. Another way to look at this is to show how much of this first 6 month growth in the industry GameStop is driving. In hardware, GameStop is driving nearly 40% of the total dollar growth. In the more profitable software and accessory categories, GameStop is driving 83% 87% of total dollar growth. So, while some of our competitors have been discounting hardware below cost as a loss leader, we continue to execute our buy sell trade program to win the share battle and capture nearly all of the growth in the profitable software and accessory categories. Our Q1 software market share on Xbox 1 and PS4 was 49.1%. Customers understand the value of our buy sell trade model and they are leveraging that to afford the great new games that are being launched. We are seeing strong demand for next generation games as each launch is exceeding our expectation in new console game sales. The upcoming Watch Dogs title by Ubisoft is the latest to have the most preorders of the new IP for the next gen consoles. And we expect that trend to continue with Destiny and other games to be announced at E3. In the Q1, our software attach rate rose to 4.6 units and is now 70% higher than the rest of the industry. Since launch, we've attached 3.6 physical games per console and this exceeded our competitors' attach rate by 64% according to NPD. This was slightly less than the games that we attached during the prior generation launch. However, when you add on our digital attach rate of full games, DLC and console network cards, our attach rate per console since launch increases to 4.7 in line with prior generation attach rates when including our digital attach. The new consoles are generating an increase in demand for digital 1st quarter and represented 9.5% of our total revenue. As a comparison, in the trailing 12 months, we've grown our digital receipts by 8%, which is slightly higher than the non partners combined. As an example, during the recent launch of Titanfall, 15% of the games were delivered digitally. We provide the consumer with choice and through experience to the customer. It is important to note that 20% of these digital transactions were paid for with trade credits, which is higher than our physical products, which have a 17% trade payment rate. Also over 60% of the digital goods are paid for with some form of payment other than a credit card. As in physical games, we find that discovery, curation and offline payment options are meeting the consumers' desire to purchase digital games at retail and we expect this part of our business to continue to grow. As a reminder, non GAAP digital margins are comparable to software margins. Congregate had 100 and 15% growth during the quarter led by both free to play PC growth and mobile growth. Congregate has published 9 games so far and has over 10,000,000 game downloads on the iOS and Android platforms. 1 of these games, Tyrant Unleashed, reached the status as one of the top the world. In PC gaming, we streamlined our PC digital purchase process both in stores and online. We kicked off our new online process on May 19 and our stores will be fully reset on June 2. As with DLC, PC customers can now get their digital codes delivered seamlessly to their digital lockers from our stores and online. Turning to our value business. We sourced $20,000,000 of product from publishers and manufacturers to supplement out of stock We expect this program to continue to ramp throughout the year. We expect this program to continue to ramp throughout the year. We are thrilled with the accelerated pace of consumer adoption around the new generation of platforms. And our plan of maximizing share in the profitable software, accessory and digital categories is working. Each new launch is exceeding our expectations as early adopters are anxious to purchase new IP. We expect E3 to generate a lot of excitement in the gaming community and we look forward to meeting the strong consumer demand for new innovation. I'll now turn the call over to Mike Hogan for his comments. Thanks, Tony. I'll cover 3 topics this afternoon. 1st, an update on the pre owned business and our expanding presence in the value category. 2nd, GameStop's multi channel business and its contribution to overall company growth and third, PowerUp Rewards and particularly its impact on accelerating our new businesses. Pre owned grew 7% in the U. S. For the Q1, reflecting the strength of the new console cycle and owned growth as consumers trade up at the beginning of a new console cycle. GameStop pre owned is clearly benefiting from the new console launches. Roughly 30% of our next generation hardware and software to date has been purchased with the help of trade credits. This is a strong sign that consumers see trades as a way to get the new technology they want and this provides the inventories to continue to grow the pre owned business in 2014. It's worth noting that in our power of consumer research, we continue to see very strong consumer interest for the new consoles and a majority of members who have yet to purchase their new console. This represents a huge potential wave of trades coming in over the next year or so. Now a word on the broader value opportunity and the results to date. We announced this strategy about a month ago at the GameStop Investor Day. As we outlined at that time, GameStop intends to leverage our core competencies, category knowledge, customer relationships, buy sold trade expertise and refurbishment to capture a broader sales opportunity in pre owned games as well as an expanded set of technology products. The results to date have been encouraging. We've seen significant interest from publishers in driving incremental game sales from a select list of high demand older games. As Paul and Tony mentioned, to date we have sourced value inventory from several major publishers totaling over $20,000,000 In fact, for the Q1, our external purchases of pre owned product increased by 52% versus the same period in 2013. And we are in the process of testing additional technology products. I will now update GameStop's Multichannel business. Multichannel has a very significant impact on GameStop's total business with greater than 20 greater than 60% of our customers going to GameStop on the web or mobile prior to making a purchase in our stores. For every $1 of online sales, web and mobile influence greater than $10 of store sales. In fact, 26% of games.com visitors who do not buy online make a purchase in store within 48 hours of their online visit. Multi channel continues to be a driver of total company performance in Q1, posting 103% growth for the quarter. And GameStop ranks in the top 25 retail websites in terms of total traffic according to Comscore. Leading the growth was our web in store business. When a product is not in stock or not available in a given store, consumers can still purchase the product from that store via gameset.com with free home delivery. Webin's store grew plus 4 14% year over year in Q1. Our mobile properties grew 53% in traffic and 36% in revenue versus prior year. Our mobile app is a key component of multi channel with over 4,000,000 installs. Our mobile app users spend 81% more, trade 53% more and buy 79% more pre owned than the average PowerUp member. These are our most engaged customers. We continue to invest heavily in mobile and we are preparing to launch an updated mobile app this summer. We are upgrading the entire customer experience and adding new functionality in the areas consumers want most. The highlight will be the launch of our Trade Center, where members can go learn about trades, look up values and see current promotions. Finally, a quick update on PowerUp Rewards. Our PowerUp Rewards membership continues to grow. Membership is plus 16% year over year and recently passed the 27,000,000 member mark in the U. S. And another 9,000,000 internationally. And PowerUp Pro member spend is up 6% year to date. One area we are particularly excited about is using PowerUp Rewards to help drive some of our new businesses. Power Up has now grown to the point where it represents much more than just the gaming category. For example, roughly 1 in 4 U. S. Households has a Power Up card. And on average, 1 in 12 mobile phone users in the U. S. Is a PowerUp member. PowerUp is a key component in our diversification strategy of expansion into technology brands. Our ability to build and manage relationships with heavy category users gives us a strategic advantage in these new businesses and that makes PowerUp a key asset. For example, 76% of PowerUp members own a smartphone And from member profiles, surveys and e mail, we know not only who owns smartphone, but also what specific operating system is used. This is just one example of the kinds of data we have that can be used to bring existing PowerUp customers to experience our new technology brands businesses. We have begun this process with new Simply Mac and Cricket stores. And to date, we are able to significantly accelerate the ramp for new stores. For a typical store, we can target between 50000,100000 high value customers and offer them an incentive to visit the new store. We are continuing to explore new ways to leverage PowerUp Rewards to customer value for growing technology brands. I will now turn it back over to Paul. Thank you, Mike. And with that, operator, I think we will open it up for question and answer. Thank you. And our first question will come from Arvind Bahasa from Stern AG. Thank you very much. As a first question, I was really intrigued by your comment on Titanfall. I think you mentioned about 15% of your volume was from direct downloads. First, did I hear that correctly? And maybe if you can talk about what sort of market share do you think that was for you? And then also wanted to see if you can maybe talk a little bit more about your PC digital distribution. We saw the release a couple of days ago. Tony, you mentioned the relaunch. Maybe provide some more color there please? Thank you. Yes. Armin, Tony's got he's the guru on this. I would just say unfortunately there is no publicly available digital market share. I wish there was. It would make our lives I think a little bit easier, right Tony? But Tony, you want to fill them in on Titanfall so far? Yes. So Titanfall, we basically sold the digital version in 2 forms. 1 was packed into the Titan Fall Xbox 1 bundle. And then at GameStop, we offer customers a specific SKU for the digital the full game digital download using dollars spent on Xbox Live. So that is we added up those two components of it and then looked at how many of the games are delivered digitally and that was 15%, which I believe is very much in line with, I think what EA articulated in terms percent of software that is delivered digitally. So I would say that our digital shares, if that's the case, is very close to our launch share, which is, as Rob said, generally very high. On the PC digital side, yes, like I shared, what we've done is now streamlined the process where we are giving the code delivery just like we did in DLC. It allows us to offer a refined opportunity for the consumer to get those codes very quickly and easily. They can start their download from the phone. They can or they can get the sorry, they can get the code in their digital locker just like with DLC. And we are providing them with a direct access then to either Steam or Origin depending on where they're actually going to play the games. We're just making it much easier for them to be able to get the game. And we're doing that online as well as in our stores. Last question for me is on new software. As we think about the games that are coming out in the Q2, as I look back to the Q2 of last year, I think new software sales I recall got worse. So in theory you have slightly easier comparisons, but I know it all depends on titles and etcetera. So generally wanted to get a sense from you on how you see new software trending given all the pressure from old generation software and the strength of new gen? Thanks. Okay, Rob. You're going to have to read the crystal ball on this I guess. Yes. A couple of things to note about what's coming up in the titles in the Q2. You've obviously got Watch Dogs. We're very excited about that. That launch is on Monday at midnight and our stores are ready for that. But one of the comparisons you've got to consider here is the fact that there's no NCAA. Obviously, that's not a worldwide title, but it is impactful in the United States. I think as we look ahead to the title slate in the back half of the year with Destiny and some of the other things that we know about are coming and more of which I'm sure we're to hear about at E3. That's where we see a significant opportunity to really drive software for the new consoles. It's also important to know Mario Kart 8 also launches next week, which should be a strong seller for Nintendo as well. Okay. Great. Thank you, guys. Thanks, Armin. And our next question will come from Brian Nagel with Oppenheimer. Good afternoon. Congratulations on a nice quarter. Thank you. Thank you very much. The question I had, I also wanted to discuss further downloads. In my job, I get questions all the time from our clients about the risks of downloads to GameStop. So as I listen to your comments today and in the comments you made before, I mean it sounds to me like you as a company view downloads as much more of an opportunity than a risk. But the question I have is with that as a backdrop, I mean, first off, do you as we think about DLC versus full game downloads, is the risk opportunity trade off different with those 2 different, I guess, digital products? And then also how do we square your comments today or your thought process towards downloads with what some of your publishers have said recently about pushing their own download business and being a potentially large margin driver for them? Tony and I are going to let the tag team this a little bit. Maybe Mike can talk about PowerUp. But I would say that this is why we bring up in our remarks that people call us and ask about digital all the time and are you scared and so forth. And we've been knocking on doors creating a technology to sell downloads for a long time. And publishers I think, are very interested in a direct business. And if that's a better solution for the consumer, that's what should happen. What we're trying to do is be a better solution for the consumer. But Tony, maybe you ought to talk about how you see DLC versus download and why it's important in our Well, like Paul mentioned, Brian, in his comments, downloadable content, a DLC is very much a launch event. We see a huge amount of the DLC that we sell identified of gamers that come together and in many cases they don't even know that that DLC exists. And like Paul said, we basically created that business by working first with Activision and sharing that learning throughout the industry and saying, hey, people are willing to invest in downloadable content with the promise of future deliveries of good content, they're willing to do that at the time of the launch. And so that's what we're very good at as well as we create launch events whenever that DLC comes out. The full games download, I see that really as just an option. If the customer wants it, we're going to provide that and then you have all the benefits that we talked about earlier. You have the buy sell trade trade credit that you can provide. You can talk to somebody who is knowledgeable about the game. Mike anything you want to add about PowerUp Rewards? Yes. I would just say if you think about the success that we've had to date and through PowerUp as we every time we go out and we talk to consumers, why they're buying digital game stuff, the top three reasons they continue to decide are they don't necessarily want to pay with credit card online. They want the value to somebody said of our buy sell trade with trade credits and they want power up points. And those reasons haven't changed in the last few years. They're still strong. And so that's where I know that you had mentioned the publishers have been saying, hey, they're going direct to customer. And I think we've got a very unique relationship with the customer as a retailer. And that's why basically our digital receipts or non GAAP digital receipts are slightly outpacing those of the 4 top publishers. And I think to Brian sometimes I think in this digital discussion we see it as binary either you're all physical or you're all digital. But the truth is the consumers we deal with are hybrid consumers who've never bought digital or just began. And we're educating them and teaching them the benefits and the value of all this great digital content our publishers produce. So our role as a retailer is to be an advocate for that consumer and teach them about this great stuff and that's the role we want to play. There will be always leading edge adopters who will only be direct with the publisher and that's fine. But our consumers are the ones we know through Power for Word. So I guess the point we're always trying to make is that digital is a growth business. If you look at our $190,000,000 of digital receipts, we like that business and we think it's good for games. Sure. And we're going to continue to knock on doors. We still think there's consumer friction in the digital process even at GameStop and we're going to continue to work with Sony and Microsoft to knock off as much of that friction as we can. And so maybe just a follow-up to that and more of a qualitative question. Are you seeing it as you're very connected with your consumers, particularly those in the Power Per Watch program. As you're communicating with these customers, are you seeing it becoming more difficult to sort of say keep customers away from full game downloads outside of the GameStop ecosystem? Or is it too difficult to tell? I don't think so. We see growth in all the PowerUp metrics and all the digital metrics. First of all, it's not a goal of ours to keep them Right. We're not in the keep people away from Publisher business. We actually want people to we actually want people to buy more of publishers' great digital content. That's a good thing for this industry. This industry needs innovation. Yes. Going back to Arvind's question, that's basically the PC digital streamlining. It's making it easier to direct those customers back to the publisher websites, so that they can get on the games they want. They still have a value to buy GameStop. We just wanted to make it easier, especially online where we had friction in the process where we streamlined. And I think if you go and try to download some full games today, I think you'll see that the role we play in discovery and making it a friendlier experience, in allowing you to in subsidizing the purchase with $1,000,000,000 of trade credits and in making it fun with PowerUp. All that stuff has tremendous value and that's the role we play. That's the role a retailer should play. Got it. And just one more quick one if I could as a follow-up. How should we think about the recent price actions on Xbox 1? Is there any read through to demand for that device or I guess, let's put it down. Well, I definitely think we're already seeing in our stores with our reservation program as well as the dialogue through Power of Awards that there's a stronger demand as a result of the price drop. I'm not sure what it's going to do on comps as you weigh the mix towards the lower price SKU and lower price point. But I the good news for us is, it sells more units. We'll sell a lot more units because we're like we shared earlier, we're driving a lot of the growth. And that means that we'll just there'll be more units out there to put software on. Thanks for the color. I appreciate it. Thank you, Brian. And next we'll take a question from Seth Sigman with Credit Suisse. Hey, guys. How are you? A couple of questions about your Tech Brands business. I guess first for Rob on the wireless economics. I think you pointed to a 10% operating margin for that business. Is that a four wall number? Or does that fully allocate any other corporate costs associated with the initiative? And then related, you kind of commented on higher margins than expected. Any more color on that would be helpful and how to think about that going forward? Thanks. Yes, Rob. That's true. The only thing I would say Seth before Rob gives us remember that we're talking about Tech Brands as a portfolio of different concepts and formats. So all of the color we give around that is an aggregated color. That's important because A, they're small and they're not super material yet. B, we have partners who would prefer that we not drill down on individual economics. So I guess looking at the results that we saw, there are various promotional programs that run, particularly on the wireless sides of the Tech Brands businesses that can have an impact on top line revenues, margin rates, etcetera, on a quarter by quarter periodic basis as the primary wireless carrier there comes up with new programs. And so in particular, there's promotion running with a new methodology around wireless postpaid and that's been very successful for us. The demand for that has been very high. I don't want to say too much about that. But to your question about the operating margin percentage that includes the overhead costs associated with running the business. That is not a four wall contribution number. Okay. Yes, that's helpful. And then just one other question that still comes up on the Tech Brands business is just the rationale behind being exclusive with AT and T and Apple. Questions come up. And as these stores start rolling out and ahead of certain product launches like any new thoughts on or anything else you can help just us understand the rationale behind that? Absolutely, Seth. It's a great question. I think what comes up a lot to us and maybe Mike Hogan can help me this too a little bit because he's sort of helping on the roll up of this fragmented dealer base. But what comes up a lot with us is how can you be successful when other competitors have multi carrier relationships and are not performing well? And I would tell you, we made a strategic decision to be an exclusive partner of these 2 companies of AT and T and Apple. We chose carefully. We studied the market. But when you are exclusive, a lot of things happen. Number 1, we're able to focus on one company's pricing programs, promotions and products. And so we have a level of knowledge in our spring and cricket stores that's really deep compared to some of our competitors in our Simply Mac stores because we only sell one company's product. The second thing is we're eligible for subsidy and promotional activity that others can't get. At the same time and then I'll ask Mike maybe to talk about sort of how he sees the dealer base. The other thing that you have to remember is we also become a distribution channel for new innovation. So if you think about our Spring Mobile stores, about half of them sell Digital Life, which is the AT and T home security product, very successful product. And about a third of them sell U verse. The reason all of them don't is because it's not available in every geography. But we are not just a phone store, but we sell digital devices. Jason Ellis and Brett Bradshaw and our team at Spring as well as Steve Bain and our team at Simply Mac, they are selling new and cutting edge innovations that these manufacturers are producing. That's unlikely to happen if we were a multi carrier. So in our world, we think exclusivity is far more productive for GameStop. And by the way, we also are a very productive channel for these companies and we're one of the last large distributed high performing specialty retail channels in the world. So that was a good reason. Mike, maybe you ought to talk about the benefits you get on the fragmented dealer base and so forth. Sure, sure. So I think Paul highlighted customer experience and AT and T relationship. I think if you look at the base of stores today, it tends the dealer base is fairly fragmented today. There's a of small operators. And I think we see certainly an opportunity there to begin to consolidate some of that in a way that increases store productivity pretty significantly and delivers a much better and much more uniform customer experience. So we think there's a real opportunity to improve the customer experience across that. And then I think to Paul's point between that and the opportunity to then begin selling expanded array of products. There's just huge upside potential for us here. All right. Thanks for the color. And just one follow-up. Is there a way to think about the store growth for that business over the next couple of quarters? I know you said 300 to 400 for the year, but just the cadence of that? It's tough to say Rob. We've got a lot of roll up a lot of opportunistic activity as well as organic, a lot of acquisition and organic. Okay. Yes. So the timing and the size of individual acquisitions is not necessarily something that we can talk a lot about right now and becomes more difficult to predict further you get away from today. I would say the way to probably think about it would be somewhat linear for the remainder of the year. We said 300 to 400 for the year. We did 50 in the Q1. So I would start to think about it that way. Okay. Thanks, guys. Thank you, Seth. And now we'll go to Sean McGowan with Needham and Company. Hey, Sean. Operator, I don't think he's there. Let's move to the next one. I think I had him on mute. Apologize for that. Can you hear me now? Yes. Yes. Yes. We got you. I was rambling. It's late. I know it's late. Very interested in the connection of the spend relative to the cost of some of these new consoles. Now that you've seen that price move by Microsoft, have you seen any kind of lift just since that's been announced? And just generally what you're seeing about after that initial purchase, is there a little bit of a delay in when they buy additional peripherals or software? Or is it happening pretty quickly? Thank you. Yes. Tony, you want to take that? Sure. Well, we haven't seen the impact of the price drop obviously since it goes live in the 2nd week of June. But people obviously, there's been more traffic into our stores as a result of as people come in to reserve it. And so excited about the reserves that we're seeing on that. And actually we've seen a slight uptick in the sale of Xbox Ones as well. And so in terms of the purchase behavior, I would say that it's probably more launch driven at this point. So for instance, the next week where we have Watch Dogs launching that is a very we're very pleased with the pre orders. They've exceeded our expectations. And we are so what we see is when there's innovation like that that's where we really see a lot of traffic in our stores. But clearly as the installed base grows you're just going to see that expand. One of the things that's interesting to me Sean is Tony keeps talking about the digital attach rate. Our attach rates are pretty healthy, But we're increasingly share of wallet is going into a digital attach. And that's going to change the economics because that's a no inventory attached that we're selling very well with these consoles. And so those of you who are at the midnight launch or go to even reserve lost stocks at this point in the GameStop are going to be presented the opportunity to understand, discover and even preorder the digital season pass that goes along with it. So you've already seen then some impact of that reduction without the Connect. So I mean that's encouraging if it's not even in effect yet, but you've already seen some impact. Yes. Just with increased traffic as people come in to talk. Okay. Thank you very much. Our next question will from Curtis Nagle with Bank of America Merrill Lynch. Good afternoon and thanks for taking the question. Just a quick one on used. Sales were certainly the best I think in a long while and I was just wondering what drove that? Was it primarily value? And then I was just curious on what's driving such strong productivity in terms of your mobile users? I don't know. It's a little early in the years. Rob, you want to take the used question? I mean, certainly, Curtis, the only thing I would say is remember that there is a predicted console effect that happens in the pre owned business that we've seen a couple of times before. So traffic wise, you're going to start to see that. But Rob, any commentary on value versus regular pre owned product? Well, value was minimal. Again, we started the program. We announced it in late March. And I've been working with publishers and the guys talked about the volume of product we were able to source in the quarter that will go into get on our shelves and be available for sale. But in terms of getting that out into the chain, not much impact on the sales in the Q1. Really what we're seeing is the impact of all the activity leading up to and through the launches and the holiday season as people bring in their old systems and games to trade toward new we expect we expect that to continue. One thing Curtis to keep in mind is and you've studied this, but I mean we have tried to make our universe of trade currency bigger over the past few years. And so today, we span from phone stores to Apple stores to video game stores. You can trade almost all of the products at all of our formats and websites and buy those products at a lot of our websites and formats. So as that universe of currencies expand, it's a tailwind for the category. Rob, as far as the productivity of the mobile, the technology brands units? Were you asking about the technology brands units? Or were you asking about the mobile app? Your mobile users on the app. And Mike? Your question is about the increased spend. Are they still productive? Yes. Why they're still productive versus I'm assuming they're much higher than your average customer? I think it's I guess I would say it's analogous to how PowerUp Pro members are more engaged and spend more with us. They give them more opportunities for engagement and they get into the GameStop ecosystem. I think we said that they buy 79% more pre owned than the average, but they also trade 53% more. One of the things that you see for example, we know as we release the new app, we know that the engaged users are using the app. We know that they want to do things like for example find a trade value. We're making it easier and easier for them to do that. And as we do that, they're more likely to come in and say look up the trade value that obviously provides a much greater value for them and that's more reason to come in. So basically because they're deeper we're giving them more ways to get more deeply involved in the GameStop ecosystem through information, through reservations, through trade credits, through the ability to buy online, the ability to buy in store. It's anecdotal, but if you're a mobile app user, when I open up my mobile app, Mike has it and his team have created it in a way that it presents all of your game library to you pretty overtly. And we haven't talked about the game library in a while. How many games are in the game library now? 138,000,000. 538,000,000 games Curtis in the game library. Remember when we started we talked about that it was a few 100,000. There's that many games in the game library. And when you open up your mobile app it shows it all to you. So I think the data says that it's heavy. I just anecdotally go use our mobile app and it presents to you just a lot of currency. And to your point, when I when we have that information, we can recommend the games you're most likely to like. We can tell you what your credit balance is that you haven't spent with us. And we can make you special offers to trade in games that we know you have towards the games that you want. And if you own an iPhone maybe we can tell and give some ideas on training classes and launches. We'll tell that as well. On training classes and launches. It's fair to say Mac, right? Mac, right? Mac or trade value at Spring Mobile. So that's the idea of the ecosystem. Got it. Thank you very much. That's very helpful. Thank you, Curtis. Our next question will come from Tony Whipple with Janney Capital Markets. Thanks. A lot to chat about. I'll try and be disciplined and keep it to 2, but probably less obvious things. So first thing is on AT and T and its proposed merger with DirecTV. Is there any reason to think that you would not benefit from having what will be DIRECTV integration into the AT and T Life Ecosystem? And then the second thing, this was a pretty big week for broadband. The FCC put out new open Internet proposals and Comcast is saying that with usage based billing, they're going to move out of test mode. What is your sense on the awareness of this big change how people are paying for Internet access and data? It seems like it would really affect video games given that the FCC is making it pretty clear that that onus will be shifted to the consumer. Hey, Tony. On DIRECTV, we want to not comment on anything like that because it's a transaction that's been rumored and hasn't closed and all of that and our partners wouldn't want us to wait into that. But what I will repeat is that one of the great virtues of exclusivity and we talked about this extensively when we started down this path, but our team at Spring Mobile would tell you if they were here that when you're good at selling products for a big partner, they bring you new products to sell. And so we're very proud of the fact that our performance Net Promoter Scores are at the highest levels at AT and T in the dealer network and we do a great job on their extended strategic products and digital life and so forth. So a scenario where we could add to our assortment is likely. And so we want to be there and be we stand for excellence in the dealer network so that we can participate. As far as broadband, IH have a pretty controversial subject. Awareness guys of the consumer don't know. Certainly, we have a high degree of awareness of how much broadband speed is available. We model it and we understand how many downloads are really happening and the challenges with that. But I can't say we don't really have an official position on that guy. Faster speeds is always better I mean we'd say I think in the digital economy, but that's about it. It seems like we're moving to a world where the consumer would have to pay for every gigabyte they consume given how big a game like Titanfall is and it's only going to get bigger. I'm just curious how many publishers you think are aware of that dynamic? And then also if you can provide an update on Walmart and just what are your latest thoughts on this foray into the used category? Okay. Tony, most publishers are aware of the cost of this if it happens? Yes. I think most publishers are aware of the all the net neutrality and all the usage based billing that they have. So I think that they're aware of that. I'm not I think they're like all of us kind of waiting to see what happens. Yes. As far as competitors entering the used space, we are in Texas. I'll have to say it's not our first rodeo. Maybe that would be a good analogy. We have not seen any impact from competitors entering the used space. I would encourage you to go do some trades at all of our competitors, because I think all of them are in the trade business, Mike. Fair to say at this point. But we have a deep knowledge of how execution looks in all those competitors and we have not had any impact from them. Great. Thank you. Okay. I think that is the last question. Thank you very much for joining us in this new time. Please feel free to give Matt Hodges any feedback in terms of the calendar, but we hope that this is a better way to carry out this call. Thanks for your support at Gamestop and good afternoon or good evening. That does conclude our conference for today. Thank you for your