Greetings and welcome to the Take 2 Interactive Software Second Quarter 20 participants are in a listen only mode. As a reminder, this
conference is being recorded.
It is now my pleasure to introduce your host, Cindy Buckwalter, Executive Vice President for Take 2 Interactive. Thank you. Ms. Buckwalter, you
may now begin. Welcome, and thank you all for joining us today for our second quarter conference call. Today's call will be led by Strauss Zelnick, Chairman of Take 2, Ben Fedter, our CEO and Lany Goldstein, our CFO. Our team will be available to answer your questions during the Q and A session following our prepared remarks. Before we begin, I'd first like to quickly review our Safe Harbor statement by reminding everyone that the statements made during this meeting that are not historical facts are considered forward looking statements under federal securities laws.
These forward looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us. We have no obligation to up state these forward looking statements. Actual operating results may vary significantly from these forward looking statements based on a variety of factors. These important factors are described in our filings with the SEC, including our 10 K for the fiscal year ended October 1, 2009, and our 10 Q for the first quarter ended January 31, 2010. These documents may be obtained from our website.
Now, I'll turn the call over the shop.
Thanks, Cindy. Good afternoon, everyone, and thank you for joining us. Today, we're very pleased to announce better than expected performance and increased guidance for of fiscal 2010. Net revenue 2nd quarter net revenue of 100 and dollars or $0.34 per share with a substantial improvement over non GAAP loss from continuing operations of $3,200,000 or $0.04 per share for the second quarter of 2009. 2nd quarter results were driven by the launches of BioShock 2, Major League Baseball 2 A10 and Grant Theft Auto episodes from Liberty City for PS 3 and PC.
Our catalog titles performed ahead of our expectation including continued strong sales of NDA 2K10, Grand Theft Auto 4, and other Grand Theft Auto products, as well as Borderlands. Our digitally delivered offerings were also a meaningful contributor to our results. Digital represented approximately 9% of our revenue in 2nd quarter and was nearly 20% higher than our first quarter of this year. We're actively seeking additional opportunities to leverage the strength of our ones and maximize the launches of our front line releases through digital channels. On the new release front, the most important event this year extraordinarily successful launch of Red Dead Redemption.
Developed by Rockstar Games, Red Dead Redemption features Rockstar's epic storytelling, rich characters, and vast open world gameplay. The title shipped 3 weeks ago to universal acclaim from the media and extremely favorable responses from consumers in our retail partners
around
We often talk about Take 2's commitment to innovation and creative excellence, red dead redemption embodies that commitment, and illustrates the talent has always been one of our key differentiating strengths. I'd like to thank everyone at Rockstar and everyone at Take 2 for their hard work and congratulate them on delivering its stellar title to demonstrate why interactive entertainment is today's most compelling form of art. Primarily as a result successful launch of Red Dead Redemption and strong second quarter performance, I'm pleased we're increasing our guidance for the fiscal year. Lainie will provide more later in the call. To the business remains prudent.
We're focused on executing our strategy to deliver a select diverse portfolio of a high quality titles and distribute them aggressively across the best platforms and regions. We'll continue to leverage our proven franchises by leading with our brands to enter new markets rather using our capital resources. And we'll seek to improve further upon our execution and efficiency. Now, I'll turn the call over to Ben.
Thanks, Strauss. I'd like to highlight some of our recent products and upcoming releases. First, I also would like to congratulate everyone of Rob's are for delivering one of the best titles in the history of our company in the industry, with the launch of Red Dead Redemption. We're very pleased to announce that in less than 1 month in the market, we've sold in over 5 million units worldwide. Everything about this launch the high quality of the title to the execution of the marketing campaign has been absolutely superb.
The game into a global consumer event is not something that happens overnight. It takes the dedication of a worldwide sales force and the unwavering support for valued retail partners. I'd like to thank our global retail partners for their help in making this the game event of 2010. We'll be offering additional downloadable content to the multiplayer experience throughout the summer in fall beginning with a DLC pack containing 6 exciting co op missions on June 22nd. We'll also be launching the game in Japan this fall.
Red Dead has become an important new franchise for our company. 1 our goals from the very beginning of our management team's tenure has been to diversify our product portfolio. In the course of that time, we've developed a consistent pattern of critical and commercial successes, starting with carnival games, Bireshark, NBA 2k, borderlands, and now Red Dead. Today, Take 2 is more diversified than at any other time in its history. And we achieve this while pursuing a strategy of publishing a select number of that strategy and includes 8 franchises that have sold over 5,000,000 units.
Turning our biggest franchise. Grand Theft Auto episodes from Liberty City was well received by PS 3 and PC gamers. We've been eagerly awaiting the opportunity experience new stories and characters from Rockstar. The episodes from Liberty City has been an extremely profitable and creatively successful foray into episodic content. We believe that Grand Theft Auto Forward and the episodes will continue to have a long life in the market as Grand Theft Auto San Andreas did before them.
Consumer demand for this iconic franchise remains in credit strong. Grand Theft Auto 4 has now sold over 17,000,000 units worldwide. Borderlands continues to expand its audience and our notable content for the game is helping to further drive sales for this exciting new franchise. Our double game add on pack featuring 2 previously released downloadable off offerings in a single retail SKU, provided gamers with more ways to access this premium content at an attractive price. During the second quarter, we released our first title for the iPad, Sid Meier's Civilization Revolution.
The team at 2 k China did a great job of enhancing the popularity the the popular title by taking advantage of the platform's multi touch screen and high resolution graphics to deliver an even more fun and addictive gameplay experience. We're pleased to expand our relationship with Apple and will selectively introduce use more of our franchises on their platforms. Rockstar will release their award winning handheld title, grabbed up to auto Chinatown Wars for the eye add later this month. Our catalog business remains a key driver for our company and illustrates us of having such a strong portfolio of the industry's top franchises. With the release of every new single, every new AAA title, we are in increasing the value of our catalog and deepening the pool of brands that we can draw upon to expand into emerging markets, platforms, and regions.
Building upon our diversity, I'd like to highlight some of our key releases for the balance of the year. On August 24th, 2 K games will launch Mapia 2, the eagerly anticipated sequel to Mapia that has shipped more than 2,000,000 units worldwide. Lafya too is being developed by 2 k check, the talented team behind the original title, and is poised to redefine the honor and the most gamers in the most authentic and action packed mafia game to date. The game's cinematic Hollywood style meticulously locates the clothing, cars, music, and culture of the 19 forties 1950s. 2 k is partnered with Nvidia, incorporate, they fit, incorporate their physics, and they text technology in Temafia 2, which will make the game's characters and environments incredibly realistic.
The PC verse of the title, we use NVIDIA's 3 d vision technology, which combines high-tech, wireless glasses, and advanced software create a highly immersive experience. Lafayette 2 has been gaining tremendous momentum with the press and consumers. The game will be fully playable and a centerpiece at 2 Ks E3 Booth next week. 2 Ks supporting the title with a major marketing campaign that is already underway. Building upon our relate, our leadership position, and downloadable content.
2K check is creating a series of exclusive content packs that that our retail partners in in GameStop, Amazon, and Best Buy will offer their customers who pre order mafia too. Walmart.com will be offering an exclusive $10 Walmart e gift card to their customers who pre ordered the game. Now, August 2 K will launch a a comprehensive demo program on Xbox Live marketplace, PSN, and the internet that will allow gamers to experience the game leading up to its launch. And this marketing activities will include national TV, outdoor campaigns, and print and online ads. Let's playing 2 K Games announced that XCOM, the reimagining of 1 of the gaming industry's most storied and beloved franchises is in development with 2 MRN.
The studio behind Fireshock 2. The game will combine the strategic core of the groundbreaking franchise wise, you know, suspense still narrative set in a first person shooter experience. We're excited about this title and are confident that 2 camera will leverage their expertise in immersive storytelling for Xcom. As we previously announced, while quarter. Our fiscal 2010 guidance reflected the potential movement of 1 of our AAA titles out of the fiscal year.
Today, we are confirming that we not expect to ship Max Payne 3 during this fiscal year. While we do not take the movement of any title lightly, our recent success with Red Dead Redemption the importance and the benefit of giving a title the time that it needs in order to fulfill its potential in the marketplace. The team at Blackstar is focused on making this the best possible experience in interactive entertainment. Our teams remain our AAA titles planned for Q4, including Sid Meier's Civilization 5, L. N.
War, NBA K 11 and new carnival games. Last week, 2 K sports announced that Michael Jordan arguably the greatest basketball player of all time will appear on the cover of NBA 2k11, which is scheduled for release on October on October 5th. We're incredibly excited to partner with this legends to take our number one basketball franchise to new heights. 2K Sports NBA 2K10 remains the industry's undisputed basketball champion, and now shipped over 3,000,000 units. According to April NPD numbers, this title has 75% market share on Xbox 360 and 66% market share on the PS 3 in the US.
Sid Meier's civilization 5 has been generating significant buzz since its February cover story GamePro. The franchise has an has an enormous fan base, and SiP 5 has been nominated for an E 3 Reader's choice award by Game Spot. Was selected as one of the top 10 most anticipated PC titles of 2010 by game informer. 2K and for access are partnering with valve to power all PC versions of SIP V with many of steamworks' features, and it will offer a special digital on steam. Gamblers who pre order any version of SIP 5 via steam will receive free downloadable content that will be available on day that the title launches.
Today, we announced new carnival games, the latest offering from 2 K Play's breakout franchise on the Wii NDS that has sold more than 6,000,000 units worldwide. The original Carnival games for the Wii is the 3rd best selling third party Wii title of all time. Developed by our Cat Daddy game studio, the team behind the successful brand, new carnival games will feature over 30 new games and attractions, and hundreds of prizes. Motion plus compatibility that will provide increased accuracy, enhanced gameplay, and more precision than ever before. We're excited to build upon the success of this franchise and believe that the title will be perfectly timed for this holiday season.
2 K play will also will also have an entirely new lineup of Nickelodeon titles, featuring featuring Door the Explorer and Diego, including Door Big Brit Day Venture, Doris Cooking Club, and Go Diego Go Mega Blocks Build and Rescue. All of these titles will allow children to embrace adventure, learn new skills and celebrate cultural diversity. We're looking to participating in E3 next week. Lifestyle will not be attending or showing any titles at this year's event. They remain hard at work on their games and will continue to support their titles with outstanding marketing campaigns and retail partnerships as they have done in the past.
E3 promises to be an show for industry and for our 2 K label. Many of our upcoming 2 K releases will be on display and will be offering sneak peaks at spec ops, the line, and Dexcom. Invite those who attend to stop by the 2 K booth and see our titles. We're very proud of our recent accomplishments. We continue strive to deliver products that set new benchmarks for innovation and creativity, to operate our businesses efficiently and to bring value to our shareholders.
Now, I'd like to turn the call over to Lainie.
Thanks, Ben, and good afternoon, everyone. Today, I'll review our quarter results and then discuss our outlook the balance of the year. Please note that all the numbers I'll be providing today will be our results from continuing operations. The continued operations in our financial statements are related to the jack of all games distribution business, which we sold in February. In addition, all of the numbers that I will discuss are non GAAP unless otherwise noted.
Other than net revenue, which is not affected by any non GAAP reconciling items. Our press release provides a complete reconciliation of our GAAP to non GAAP numbers. Net revenue was 2 68,000,000 in the 2nd quarter, nearly a 54% increase from 174,300,000 for the comparable period a year ago. Non GAAP income for last year or a loss per share of $0.04. There were several factors that led to our results exceeding guidance.
Our the revenue side, a variety of our titles performed better than expected, including Grand Theft Auto 4, Grand Theft Auto episodes from Liberty City, as well as our entire catalog led by our GTA title. Our catalog business was approximately 32% of revenue in the quarter. This is was well received by the media and was profitable for us. However, sales slow down soon than we had expected. Our Q2 gross margins were slightly lower than anticipated, primarily due to promotional support required for the title.
Our Q2 results reflect the estimated retail support we believe will be required for the sell through of BioShock 2. Gross margins were also affected by our product mix. Looking at expenses, our overall operating expenses were lower than forecast, mainly in G and R and D. For G And A, we achieved savings during the quarter from reduced professional fees, along with our cost cutting initiatives and lower personnel expenses. R and D expenses were lower than expected due to the timing of headcount additions and higher capitalization rates.
We realized the $1,200,000 tax benefit compared our forecasted expense of $300,000, primarily due to the release of tax reserves during the quarter. Leading the 2nd quarter sales for BioShock 2, Grand Theft Auto episodes from Liberty City, Major League Baseball 2K10 and the 82K A10 and Grand Theft Auto 4. Our digitally delivered business was also strong this quarter. Digital revenue was about 23,000,000, up from out 19,000,000 in Q1 this year. Our GAAP results for the 2nd quarter were income of 16,900,000 from continuing operations or $0.20 per share compared with a loss from continuing operations of $10,400,000 or $0.13 per share in the 2nd quarter of 2009.
And looking at our Q2 results this year compared to the same period last year, our non up from 38%, primarily due to our product mix and the percentage of our sales at higher average price points this year. Non GAAP operating expenses in the 2nd quarter rose from the same period of the prior year, mostly due to a $13,000,000 increase in selling marketing expenses. Majority of this increase was for marketing and sales support related to BioShock 2 and Red Dead Redemption. All other categories of operating expenses declined year over year. G and A expenses decreased by about $4,000,000 or 16% largely due to lower professional fees.
R and D expenses decreased by 2,000,000, mainly due to higher capitalization rates. Interest and other expense increased by about $1,000,000, primarily reflecting higher cash interest expense as compared to last year. As the impact of the higher debt level and our convertible notes more than offset our more advantageous coupon rates. Moving on to our balance sheet, at the end of Q2, we had approximately $181,000,000 in cash. Our accounts receivable reserves were about $55,000,000 at the end of the quarter.
Reserves were approximately 58% of gross receivables, largely related to the retail performance of BioSAC 2. Inventory at the end of the quarter was approximately 25 $1,000,000, relatively flat with levels at year end. Software development costs and licenses were up compared to year end, reflecting the significant development efforts around AAA fiscal 2010 releases. Now to our outlook, which is provided on a non GAAP basis, this. We are increasing our fiscal 2010 guidance based on our strong launch of Red Dead Redemption and our better than expected Q2 results.
Maintaining our release schedule is critical to achieving our fiscal year numbers. Our results may also be affected by variability in foreign exchange rates, which difficult to forecast. Our guidance is based on spot rates as of the time we finalized our forecast. For the full year, we expect non GAAP loss per share in the range of 10 to 30¢ on $880,000,000 to $980,000,000 in revenue. This excludes stock based compensation expense of $0.39 per share.
Non cash interest expense on our convertible notes of $0.09 per citiary, unusual legal matters of $0.07 per share, and non cash tax expense of $0.06 per share. We expect gross margins fiscal 2010 to be in the high 30s. This is up from fiscal 2009, primarily due to the number of inter owned and developed titles we have launched in 2010, as well as the Rockstar Royalty Plan, which is a profit sharing range it. We continue to expect our Major League Baseball business to lose approximately $30,000,000 to $35,000,000 or $0.38 to $0.44 per share on a non GAAP based which is included in our fiscal year guidance. Our fiscal 2010 guidance reflects tax expense of about $5,000,000, largely attributable to our operations with an estimated share count of approximately 80,000,000.
We're issuing initial guidance today for the 3rd fourth quarter. For Q3 3, we expect non GAAP loss per share in the range of $0.10 to $0.20 on $250,000,000 to $300,000,000 in revenue. This excludes stock based compensation expense of $0.15 per share, non cash interest and non cash tax expense of $0.03 per share, and expenses related to unusual legal matters and business restructuring of $0.01 per share. For Q4, we expect non GAAP loss to share in the range of $10 to $0.20 on $200,000,000 to $250,000,000 in revenue. This excludes stock based compensation expense of $0.07 per share.
Non cash interest and non cash tax expense of $0.03 per share, and expenses related to unusual legal matters and business restructuring of $0.01 per share. ResMed redemption is our key release for the 3rd quarter and is expected to drive a significant percentage of the revenue. Based on the development costs for the title, internal royalties based on Rockford's profitability and their product mix for the quarter, we expect overall gross margins in the low 30s. Our Keith Huddl's plan for Q4 are L. A.
Noir, mafia 2, Sid Meier's Civilization V, new Carnival games, and NBA 2K11. Based on the mix of titles in the quarter and a relatively large number of internally owned and developed titles, We expect gross margins to increase into the low 40s in fourth quarter. We expect overall operating expenses to increase in Q3 and Q4 compared to Q2 this year, primarily driven by higher selling and marketing expenses in connection with our new product launches. Despite increased G and A expense levels still reflect our cost savings initiatives. Selling and marketing expenses will be about 20% higher in Q3 as compared to Q2, primarily due to the release of Red Dead Redemption and about 25% higher in Q4 compared to Q2 due to the number of new titles planned for release in the fourth quarter.
G and A is forecast to rise about 30% in Q3 and 20% in Q3 4 compared to Q2, largely due to timing and reductions of expenses relating to legal matters in the second quarter. And higher incentive compensation in Q3 and Q4 due to our improved forecast. For the full year, G and A is expected to decrease by nearly 8% from fiscal 1009. R and D expenses are expected to grow by about 25% in both Q3 and Q4 in Paris into Q2, as our development studio's complete titles and capitalization rates decline. Depreciation and to increase by about 5% in Q3 as compared to Q2, and also increased about 10% in Q4 compared to due due to the timing of budgeted capital expenditures during the year.
Our Q3 and Q4 guidance reflects tax expense of about $2,000,000 in each quarter, primarily attributable to our international operations with an estimated share count of approximately $80,000,000 for both Q3 and Q4. I'll conclude by saying that we are pleased with our 2nd quarter results, our strong launch of Red Dead Redemption and our improved outlook for the year. We remain focused on executing on our product release schedule for the balance of the year. Now, I'll turn the call back to Strauss.
Thanks, Our second quarter results and increased outlook reflect the continued hard work and dedication of all of our colleagues, and I'd like to thank everyone for their contributions. We're very pleased with our achievements, both creative and financial during this period, and we'll endeavor to build upon this met them and strengthen our position as a leader in the interactive entertainment industry. We'll now be happy to take your questions.
We'll now be conducting Our first question comes from Jess Loubert from Wells Fargo Securities. Yes,
afternoon. Thank you for taking my question. A couple of questions actually on the outlook. You know, first with respect to red debt has obviously gotten off to an incredible start. That said, you know, you're still forecasting a loss per share for the third quarter.
Can you comment whether or not Red Dead will be profitable in the period. And then respect to the Q4 outlook for $200,000,000 to $250,000,000 in sales. Last year, had only 1 AAA property in the form of border lands during q 4, which launched at the end of the quarter. You still reported 280,000,000 dollars in publishing sales in a pretty difficult retail environment. This year, you're expecting to have LA new R, Sid Meyers, Civilization, and Mopka 2 in the period.
Are you assuming one titles could slip, or is there something else that's driving the conservative top line outlook?
I'll take the first question. First, obviously, while we invested significantly behind development and marketing in line with quality and the scope of the game for Red Dead Redemption, it is profitable in the quarter and is on track to become more profitable this year. So we're really excited about where it is. It's also a great start and, you know, we really see a great future and great opportunities for that title. The second question regarding the fourth quarter, last year, we had, MBA also for, 2K10, and, that had a great launch as well as the Borderlands title in Q4.
And, also we have NHL title in the quarter. And, we don't have that title this year. And we also have had a big catalog last year going into the the season, and we're having a prudent outlook towards the retail environment right now. So we took a hard look at our catalog and what we thought it could achieve during Q4. So we're hopeful that there'll be opportunity there, but we wanted to put in our numbers what we thought of right now, what's going on in the retail environment?
So is NBA planned for Q4 this year, or or is it not Q4. And I I I guess, can you just give us a sense of confidence regarding LA new R and Sid Meyers and mafia whether or not they will ship in Q4?
Yeah. The NDA is is planned, obviously, and that is a release schedule that we announced and, you know, we are, we are taking a prudent outlook towards it. We did move one title out of the year as, as we indicated in the release.
And the other titles that you mentioned are planned for Q4, and that's the information that we have at the moment. So, that's included in our numbers.
Thank you very much.
Thank you. Our next question comes from Heath Terry from FBR Capital Markets. Thanks.
Can you give us
a sense of what you're seeing so far with, with Red Dead just, you know, over the, I realize it's a relatively short period so far, but over the life of the game, to to date, what kind of pattern that you're saying this is a game that that doesn't seem to have a whole lot of, downloadable content plan for least not that you guys have talked about as much, is it, is it showing up more in the, in the used game market or at least as as far as what you can tell from the, from your retail partners?
Let me put it in character and then Ben will talk
a little more detail about the plans. You
know, we, we're not announcing right now the, the pattern of retail. I think the, the review speak for themselves, the 95, average metacritic rating. Consumers are delighted by the title. It's groundbreaking. It's exceeded everyone's expectations in the marketplace, except perhaps those of the people here who we've been excited for some time.
And I think, I think I said so on prior calls. We, we have high hopes for the title. As Lainie said, it's, it's already profitable in the quarter and, supporting it. And, while trying to a prudent outlook and a reasonable tone. Obviously, the, you know, the team here is just so thrilled and gratified with what we see and, and all of the feedback from consumers is exceedingly positive.
Hey, it's, it's Ben. I think the nature of your question relates to what we've been seeing across the board in the industry about the quick drop off of sales, on AAA titles. And one of the things we've been looking for is, evidence of legs in the game. And, you know, I think, I fair to say that we're cautiously optimistic that this game does have some legs. And, we've seen sales reflect that.
That said, I mean, it's following an erosion curve that's, you know, that every game will follow, but we're, you know, as I said, we're cautiously optimistic. With respect to downloadable content, we have announced, for a first pack of co op play on June 22, the number of missions, the co op missions that we're pretty excited about, and I think consumers are going to be excited about. We haven't, to announce anything further beyond that. But as I said, I think we're cautiously optimistic that this game will be attractive to consumers for a long time to come.
Great. Thanks. And, you know, one, I guess, kind
of follow-up question to that then, maybe on a little bit bigger picture, kind of format, you know, we we've seen companies taking different tax towards the the used game market, whether it's, you know, EA and Microsoft with the registration keys for some of their games, you know, Activision may be more aggressively pushing, you know, downloadable or immediately upon the the release of the game. Can you give us a sense of of how big a priority you feel like this is for, for Take 2, how important it is, and and whether or not there's, a consensus forming, around the best way to try to address that erosion curve that's being driven by the, the used game market?
Well, I don't, I don't want to hazard what drives the erosion curve. I think there are a lot of, a lot of factors behind how how quickly games erode. I will say that, you know, DLC for us, as much as anything is about consumer experience and providing the best possible experience. I do think it's fair to say that any AAA title needs some sort of aftermarket content to be competitive. For any number of reasons.
And I think certainly we have that that that memo. I think the industry is still innovating around what that downloadable content or aftermarket concept needs to be. There's still a lot of experimentation. We continue to innovate around that, think, for example, in, borderlands, we were, we saw some tremendous success in kind of a, a, rapid succession of downloadable initially and then making it available to retail afterwards. And we're gonna continue to see all that.
So this is really not not necessarily about use game sales. In fact, as I said in Borderlands, we make it, we make the downloadable content available to retail as well to sure, the broadest possible audience has access to our content. And this is, at the end of the day, mostly about delighting the consumer And at the end of the day, mostly about enhancing the brands. One of the ways we look at our business is really about launching brands, managing brands, exploiting brands, and, downloadable content is part of that brand franchise and brand management strategy.
Great. Thanks, Ben.
Thank you Our next question comes from Arvind Batya from Sterny G. Thank
you, guys.
My first question is, just to be clear, Max Payne 3, you know, you said it's moving on to fiscal 2010. You did not put it in fiscal 11, but that's understood, I assume. And second question is on Carnival games. Is that, in your it's it's at fall, but is it in your physical ten or is it in the first quarter of fiscal 11? And then lastly, just on, what your plans might be for Natal and move.
Thanks, Arvind. No, Max Payne, we haven't announced a release date. To be clear. Carnival games, yes, is scheduled for this fiscal year. And the pollen move, I think our point of view is we really do by our our our creative teams on on operating and innovating, at the cutting edge.
And I I think, we've been happy that we've done there's always a balance between, something new, the investment you make and what's right for the individual titles. E3 is coming up. I think you'll see some things there. And I don't really wanna comment on it further now. I do think there's some terrific opportunities with these new, these new devices.
K. Thank you.
Thank you. Our next question from Atul Bhagha from Bank Equity.
Hey guys, thanks for taking my call. My question is regarding the catalog sales. Can we about the linearity of catalog sales in 2nd quarter and what kind of sales you've been seeing so far in 3rd quarter. And also is the kind of impact on the SPs, Hokkadilocksmiths? Thank you.
Atul, could you I'm sorry. You repeat those when you broke up? Could you repeat both of those questions?
Sure. So my question was regarding catalog sales, linearity of during the second quarter and what you're seeing so far in 3rd quarter. And also, what is the kind of impact you're seeing on ASPs? The
the Cadillac sale for Q2 were extremely strong in the quarter. We're seeing that it was higher than really drove the quarter's revenue. And for the ASPs and catalog sales, we're seeing pretty flat for some of our titles. It depends on when the title moves into the, the catalog category. So it really, depends on the life of when those titles start to move into it.
Gotcha. And and so far in in 3rd quarter, have you seen any changes in catalog sales?
Well, if we definitely are seeing, you know, the, the retail environment is still seems to be challenging. So we, we don't feel that it will be as strong as Q2 do, but we're continuing to work, with the retailers on our catalog and we're going into the summer season. And historically, that's been a slower season for our industry.
Okay. Thank you.
Thank you. Our next question comes from Doug from Cowen and Company.
Thanks. Yeah. Question about BioShock too, you alluded to on the call. How quickly the sales fell off, and we've seen some pretty aggressive discounting, retail on it. And you you talked about how, you've you you I think you said you felt like you'd, in your two numbers you covered or what your costs are going to be to support it.
Just to just to be clear, do you feel like in your Q two numbers, it reflects what you might have to take going forward in terms of price protection or return reserves?
Yes.
Okay. Thanks.
Our next question comes from Eric handler from MKM Partners.
Yes. Thanks for taking my question. So you've had really good success now with border and now Red Dead Redemption. So as you look forward, what do you what do you what taking right now to ensure that we may be seeing these games 2, 3 years from now rather than 5 years now?
It's a it's a good question. I think we're very, we're very pleased that the, the company's execution of the board and efficiency across the board has improved. You know, we have a 3 part strategy here, be the most creative company in the business, the most innovative and the most efficient.
I
think, you know, once again, our labels continue to prove that they're the most creative labels in the business. A company as a whole is innovating, whether that's through trying new platforms, whether it's through development of NBA online in China, MR other activities in Asia, expanding our presence in Japan, building up our international sales, and really being on the on the leading edge, if not the bleeding edge in terms of exploring what new platforms can offer us, whether that's Facebook or iPhone or iPad or other mobile devices or, you know, all the things that we explore and we do so, in a way that's consistent with what consumers want from our titles and what our titles have to offer consumers has been said, we aim to delight consumers and define them wherever they can be found enjoying interactive entertainment. Sorry. I am I am. I promise I'm coming around to your question that I I I know I'm doing it about way.
Part of, part of running 1 of these businesses is making sure that you do come to market regularly with your franchise, otherwise, why deliver them it is a balance between bringing out something that's extraordinary, you know, that's off the charts that can really make a difference on the one hand, and on the other hand, managing our to development and and managing our release schedules. And there is a bit of tension there. And at times, you know, it we haven't optimized it. I think our goal is to optimize a, I think, the, the release of Red Dead Redemption, which was really, you know, a terrific combination of A plus development and A plus marketing and the commitment of the entire enterprise around the world in a highly organized manner and you see the results.
I feel like, you know, that's a sign
that we're moving in the right direction. And I think our release schedule going forward will reflect that also.
Okay. Thank you.
I hesitate to say this, but I hesitate to say this, but one of the reasons that I think red dead redemption was so successful is because it wasn't another franchise. It was new content, doesn't involve aliens, doesn't involve, you know, kind of army people. It involves a whole new way of what an open world entertainment. It really takes some of the best of what Rockstar has to offer in terms of a new point of view to delivering something new to consumers that delight them. And kind of, you know, one left when everybody else went right and there's always kind of exploiting franchises, we went ahead and delivered something even this late in the console cycle.
This console cycle's full of surprises, and this is one of them. But I think, I, I take your point. It takes Josh's point. I also think one of the reasons red debt redemption is so successful because it's not a reiteration of an old franchise.
Great. Thank you.
Comes from Ben Schachter from Broadpoint AndTech.
Hey, guys. Congratulations on the success of Red Dead. A few questions Lanny, on the FX, can you tell us when you did finalize forecast? We can get an idea of what those look like. And then on Red Dead, I know digital may not be the the, primarily for revenue generation, but what do you think that could generate on on the digital side going forward for rest of the year?
And then also if you can give us an update on agent, is it still an exclusive? And then finally, Strauss, you mentioned that the industry is continuing to face some difficult headwinds. Obviously, there are macro concerns, but if we remove the macro concerns, what do you think are the specific events or the levers for the industry for the year? Thanks.
Ben, for your first question on FX, we we fund as a forecast in the last few days. So it's based on the spot rates as of those dates and, you know, we'll continue to monitor it during the quarter. But but, we're hoping that, you know, it averages out to around those numbers.
Yeah. And the other points, you know, we don't we're not gonna project what we think digital distribution will do red dead. Obviously, it's an area of enormous focus for us and for the industry. And a great way to reach consumers, and, we think there's opportunity across the board for the title. On agent, there's no change in in situation with the title.
And I'm sorry, your your 3rd question, your 4th question of a macro I wonder if you could post it again. I'm not sure I followed it entirely.
Oh, I think, aside from the macroeconomic picture, aside from that, what do you think are the industry specific events gonna be the key levers for the industry for the year?
Most important thing is putting out hit titles and, you know, hit titles generate, sales for our competitors well as for us. So getting traffic at retail and getting excitement around the industry is a good thing. I I think all of us are concerned. I know it's not the question you posed. We are concerned about the macroeconomic environment.
Some of the feedback we got from consumers around Red Dead, which was great for us, but not necessarily great for others, was, you know, I'm shifting my spending to buy Red Dead, you know, I can't afford to buy, you know, all the titles around the marketplace. And I think that's that's really the concern that I have. So probably, you know, the only other lever would be, announcements of new titles from our competitors that are phenomenal or on hits from our competitors. And frankly, you know, we wish everyone well, because it benefits all of us. Our additional sales, discounting hardware, more hardware sales obviously benefit us.
And, other announcements on the hardware side could have an influence on the The biggest factors right now are, you know, the interaction of macroeconomic factors and the nature of the titles you put out, and all we can control is the nature
of the titles we put out,
and that's what we're this time.
Great. Thanks.
Thank
you. Our next question comes from Mike Hickey from Genco Partners.
Thanks, guys. Congratulations to Rockstar on Red Dead. Truly awesome experience. Just curious on that with 2 camera into an XCOM what implications this that may have on the future of your BioShock franchise. And then following that, with the 6 of red debt.
What's your philosophy on iterating that in the future?
Hey, Mike. 2K Marin is working on XCOM, you know, as it relates to BioShock, we think BioShock is, still one of the most important franchises in the industry. We do intend to support it. Doesn't necessarily have to be a 2K MRN, but we do intend to support the franchise. 1st and foremost, we're focused on downloadable content.
We intend to to support BioShock 2, with further downloadable content, we think the, the title of the franchise, has a long life Indeed. And, 2K Marin's focus on Xcom is just, you know, bringing another story franchise to the marketplace, which is, with respect to another iteration on Red Dead Redemption, it's, I mean, it's pretty much the same answer. It's like we're focused on delivering new downloadable content coming June 21st, sorry, June 22nd, first. And then, further supporting the brand and the title, and then we'll focus this on, iterations or not kind of as we go down the line. But sitting here today, we're focused on making this iteration of dead, as successful as it possibly can be as successful as it's already been.
You think there's more success coming.
Fair enough. And then,
now that we're in Q3 here, can you give sort of perspective on your fiscal and then, performance opportunity?
No, it's too early to talk about that. Okay.
And then, Lainie, did you give catalog sales for the quarter Mister, if you did.
Today, it was about 30. Hold on one sec. It's about 32%. Okay.
Awesome. Great job guys.
Thank you. Our next question comes from Justin Post from Bank of America Merrill Lynch. Great. Thank you.
What's my question that answered past, but one question on gross margins in the 3rd quarter, obviously, very successful title with Red Dead. Is that kind of a framework for how, gross margins will look under a successful, rock our title release, are there any abnormal puts and takes in the quarter? Thank you.
For Q3, we mentioned that our gross margin was going to be in the low 30s. In that is driven by Red Dead Redemption in the quarter. And that title has some significant development costs associated with it, and a significant internal royalties based on Rockstar's profitability. So I wouldn't say that that would be the the normal for an internally owned and developed IP. So if you look at Q4 where we have some, some more titles coming out that are internally owned in IP, we're running in the low 40s, which is probably more of the norm for the company.
You. At this time, we have no further questions. I'd like to turn the call back over to Strauss Zelnick for any closing comments.
First of all, thanks so