Good day and welcome to the GameStop Corporation’s Fourth Quarter and Full Year 2014 Earnings Conference Call. A supplemental slide presentation is available at investor.gamestop.com. At the conclusion of the announcement, a question-and-answer session will be conducted electronically. [Operator Instructions] 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 would like to turn the call over to Paul Raines, Chief Executive Officer of GameStop Corporation. Please go ahead, sir.

Thank you, operator and welcome to the year ending earnings call for GameStop. As we begin our call, I as always want to thank our global team for delivering outstanding customer service in 2014. Joining me today on our call are Rob Lloyd, Chief Financial Officer; Tony Bartel, Chief Operating Officer; Mike Mauler, President of International; Mike Hogan, our EVP of Strategic Business and Brand Development; and Matt Hodges, our Vice President of Investor Relations. In 2014, we saw many aspects of our strategic plan come to fruition and I am very proud of the dedication and execution of our entire team. One of our goals is to maximize our brick-and-mortar stores and our next-gen videogame hardware and software launches were dominant as we delivered all-time high market share of 28% on hardware and 46% on software. All the investment in PowerUp rewards the unique content. Execution and customer service paid off with this generation. We expect that to continue. Non-GAAP digital receipts climbed 31% year-over-year and digital is a solid growth story for us. We delivered this year $948 million of digital revenues. If you go back and look at our 2010 Investor Day, we forecast $1.5 billion by 2015. And though we will not reach that target, our growth is comparable or ahead of most publishers. Rob will discuss our digital market share and our progress in that business with you. Pre-owned showed growth of 2.6% in a declining software market and maintained healthy margins. You will recall that last year we introduced the value category as our strategy to gain share in new games sold below $20 as well as growing our pre-owned category. I am pleased to report that our market share in this category grew by 2% indicating that our buying took inventory out of…

Thank you, Paul. Good afternoon. Today I would like to take you through four major points. First, I will very briefly recap our growth for fiscal 2014. Next I would like to discuss our 2015 guidance focusing on software growth. Third, I will provide some information about digital from both the market and a GameStop perspective. And lastly I will provide additional color and metrics on our technology brands segment. So let’s begin with the 2014 recap on Slide 2. Overall results were in line with our expectations. Sales decreased 5.6% in the fourth quarter, but increased 2.8% for the year. Excluding FX, sales decreased 2.8% in the fourth quarter and increased 4.3% for the year. Comparable store sales declined 1.8% for the quarter, but increased 3.4% for the year. Gross margins expanded 50 basis points for the year resulting in a 29.9% margin rate, which is our highest annual gross margin rate and the highest gross profit dollars we have achieved in our history. Operating earnings increased 7.7% for the quarter and increased 7.8% for the year. Non-GAAP net income increased 5.9% for the quarter and 10.2% for the year. Non-GAAP EPS increased 13.2% for the quarter despite a $0.05 negative impact from FX rates and increased 15.3% for the year despite $0.08 negative impact from FX. SG&A as a percentage of sales was 21.6% for the year, up from 21% the prior year period due to the growth of tech brands which carries higher SG&A rate. Now let’s look at sales for some of the categories on Slide 3. As expected hardware declined 30.2% in the quarter with a tough comp given the console launches in the same period last year. But hardware grew 17.3% for the year. Software grew 6.1% in the fourth quarter, but was down…

Thanks Rob. Good afternoon. It’s very exciting time for GameStop. At this stage of the console cycle, as we continue to dominate the videogame market around the world grow our differentiated position in market share and brands into exciting areas that leverage our retail and digital expertise. The focus of my comments today will be on the current console software environment, our plans to continue growth in our digital business and the expansion of technology brands. To-date, this has been a strong launch and GameStop has gained on every front as compared to the last launch. The PS4, Xbox One category hardware unit sales are 56% higher than PS3 Xbox 360 over the same period of time following launch. GameStop has gained significant hardware share with our unit sales up 145%. In software, we have a commanding 46% market share of PS4 Xbox One software with unit sales of 92% over the last launch cycle. And so far in 2015, we continue to dominate the new generation of software with our Xbox One and PS4 software market share at 52%, up 440 basis points over the same timeframe in 2014. We believe that new software sales were impacted in the latter part of 2014 as many games were given away at subsidized marketing incentives in next-generation hardware bundles. According to NPD, these free digital games reduced the total physical next-generation software market by $250 million. We also believe based on our discussions with publishers and platform holders that these pack-in programs will be significantly reduced in 2015. We are excited about the innovation that is coming to the new consoles in 2015. Key titles include the just launched Battlefield Hardline from Electronic Arts, the soon to be launched Mortal Kombat X and Batman: Arkham Knight from Warner Bros, Madden, FIFA,…

Thanks, Tony and good afternoon everyone. Paul asked me to comment briefly on our business development process in the areas in which we continue to explore new growth opportunities. We initiated a robust business development process a number of years ago to facilitate our diversification efforts. We are constantly exploring new prospects that could leverage core GameStop capabilities to drive future growth in value. GameStop has been the unquestioned leader in gaming for many years, but we are successfully expanding our influence to become a family of specialty retail brands that makes the most popular technologies affordable and simple. Our early efforts were primarily focused on expansion into digital gaining and produced opportunities such as the acquisition of Kongregate, which continues to perform very well for us. Since our acquisition in 2010, Kongregate revenue has grown at a 75% compound annual growth rate. Kongregate has launched a number of successful mobile games, such as Tyrant, Game of Thrones and Adventure Capitalist and PowerUp Rewards has proven instrumental in driving awareness and customer acquisition. This is in addition to our internally developed opportunities such as the sale of downloadable content in our stores and on gamestop.com. As Tony mentioned, GameStop now has an estimated 42% share for downloadable content sales. In recent years, we have expanded our focus to include a broader array of adjacent categories in which we believe our core competencies of real estate, consumer relationships, retail execution, buy/sell trade, and disciplined capital allocation can be brought to bear. Our biggest recent success was the formation and expansion of our technology brands business unit, which includes our AT&T Wireless, Cricket and Simply Mac stores. These businesses leverage core GameStop competencies and return – and in return have given us new leadership such as Jason Ellis and Steve Bain and…

Great. Thank you, Mike. I guess at this point we will now open it up for question-and-answer. Operator?

Thank you. [Operator Instructions] We will take our first question from Brian Nagel with Oppenheimer.

Hi, good afternoon.

Hi Brian.

Hi Brian.

Nice quarter, I have a couple of things I wanted with the recall of questions. First off on the pre-owned or used business, I have recognized the currency was a factor there and how it was reported, but it’s still somewhat sluggish, but as you look at 2015 and kind of the trajectory I know you weighed up pretty explicitly your thoughts about new software sales, how should we be thinking about your pre-owned business going through the course of this year relative to the new software business?

Sure Brian, Rob you want to take that.

Sure, remember that in the fourth quarter pre-owned is typically not the hot item that the gift giver wants to give to their family, so fourth quarter is never our highest growth period for pre-owned. But as we look forward as I mentioned in my comments when we compared our estimates of where the analyst models were on the category by category basis for our business, we were comparable in most of the categories, pre-owned was one of those. So digging into that data you would see that we are forecasting growth for pre-owned.

Got it. Then the second question I want to ask is regarding the first quarter guidance here we are I think almost two-thirds away through the quarter now and the guidance especially with sales and it’s a relatively wide range, can you make some comment as to how we are tracking right now?

You want to take that one?

Well, we put out the range that we put out based upon the information that we have to-date. And one of the aspects of our business that we have seen historically is a sort of a pre-Easter and post-Easter phenomenon. And so that remains a little bit of a wildcard for us.

Easter this year Rob is several weeks…

April 5.

Yes. We also have foreign exchange impacts that as any of you that are following those markets know have been pretty substantial and impactful to international businesses.

Okay, thank you very much.

Okay.

We will take our next question from Seth Sigman with Credit Suisse.

Thanks. Good afternoon and hey guys. Thanks for all the color today.

Thanks, Seth.

I had a question about capital allocation, so when you look at the $150 million to $170 million CapEx you are guiding to, second year in a row where you have had a stepped up CapEx. How much of that is tech brands, what are you embedding in there? And then secondly, how does that affect your ability to buyback stock at this point, how much cash do you feel comfortable with pertaining on the balance sheet? Is there more room to lever up potentially like you did in 2014, just trying to think through those things? Thanks.

Sure. If you think, Seth, back a couple of years in terms of what our rate had been on CapEx, it was in the roughly $130 million range. The difference between that and what you saw in 2014 and what we will see in ‘15 is technology brands. And the reason that we have arranged it which we haven’t done I think in a while is because of the wildcard associated with the RadioShack stores and our ability to negotiate for those leases that Tony talked about. I think as we look at the ability to buyback shares, we are pretty confident that we can continue to do share buybacks in excess of $200 million, it would be the minimum for the year and that still allow ourselves to do what we want to do in terms of acquisitions and capital dedicated to technology brands.

Seth, one thing too to remember is that there was a time here years ago, where it was uncomfortable with lots of things, debt, buybacks and everything else, but our board today is very progressive and I think is very comfortable with our capital allocation, disciplined capital allocation the way it’s been and the way it’s going to go forward. So, that’s not a barrier either.

Okay. And then a question on tech brands specifically, I just wonder if you could discuss the EBIT margin performance for that business line in the fourth quarter, if you just kind of back into it from the annual numbers you gave, it seems to imply a pretty big drop in the margins versus the third quarter. And at the same time, when you look at the mobile and CE category, it also seems to imply a big drop off in the gross margin versus prior quarters, any more color there? Thanks.

I am sorry. Could you repeat the last part of the question there?

So, within your mobile category when you breakout the gross margins, it seems to imply a big drop in the gross margin in Q4 relative to Q3?

Yes, Tony, you want to talk about that? There is one of the things about the cellular business is you have various promotions and holiday things coming and going. So, Tony, you want to take that?

Absolutely. That’s one of the things that takes place there is that you do have shifts between sales and gross margin rates. And that’s one of the things that did take place during the fourth quarter as we had a shift. Based on the compensation programs that we have with AT&T, which is our exclusive partner, you will sometimes get shifts, so you will see gross margin rates fluctuate, that you will see gross margin dollars being more consistent.

Is there a way to think about the annual gross margin rate for that category going forward?

Rob, you want to take that?

Yes, I would say probably and then – so, what we saw in 2014, if you think about the mobile and consumer electronics category as we categorize sales, the margin rates if I remember correctly were between 35% and 40%. And I would say think about that business, that category in that range and of course that contains technology branch.

As an example, Seth, you will have promotions on a particular SKU, where you won’t have the inventory in the store. You will sell the product, but you will not bring the retail of the hardware of the handset that you will get all the gross margin. And those promotions come and go with various carriers and so that’s what makes this a little bit more complex than the videogame business.

Okay, thanks guys. Good luck.

We will take our next question from Chris Merwin with Barclays.

Alright, great. Thank you. So, I just had a couple of questions. The first one is can you talk a bit about what the DLC attach rate is at your retail stores and how that compares to the last cycle? Are you seeing some stability in the mix shift of DLC being sold at the retail stores versus on consoles? And then secondly in terms of the impact that the digital download business is having on physical sales for new-gen, have you found that some genres like shooters are doing better where maybe the resale value is a bit higher for the customer or is it pretty consistent across all the genres of titles that you sell in and do you see that changing over time? Thank you.

Sure. And welcome Chris to the call. Tony, that sounds like one of your products…

Sure, yes. But on the DFC shift, it’s a little hard to talk about the launch over launch because there really was no deal to see back when the 360 and PS3 launch. So it’s a business that’s really we have created and then created since then, and quite honestly it’s been accelerated since GameStop got into that business. So when we look at attach rates we will typically attach about 30% to 40% of add-on downloadable content to a title when it launches and it tends to be fairly consistent regardless of genre. There are obviously some price point differences, so if you have downloadable content is a higher-priced to get a slightly lower attach rate, but essentially it’s a very strong attach rate. And again that really is our associates who are selling that at the time of launch that drives our 42% market share.

What about the – Tony you want to make any comment on the trade-in business on genres, with any genres you get more trade?

Yes on the trade-in business we have seen a very consistent across genres and very consistent really across AAA titles. I think some that have a little stronger downloadable content will actually the trade-ins will be a little bit delayed, but the percent of trades that we get are generally very strong and they typically come in from 45 days to 90 days after the game is launched.

And then tailing on Chris’ question, this is Amir Rozwadowski the telecom analyst at Barclays. I was wondering if I could touch upon some of the increased efforts you folks have had been placing on additional product distribution capabilities and opportunities, specifically it seems that phone distribution has picked up momentum largely due to your partnership with AT&T including the cricket brand. I was wondering if you can provide some additional color on the piece of the business, the specific drivers for growth. For example, are you seeing an opportunity to work with AT&T and consolidating their distribution strategy tapping additional markets where they may not have an active footprint and where are you to seek contribution from or where do you expect to see contribution from this segment over the mid to longer term. And then as a second question, AT&T seems to be on the verge of closing a pretty large transaction with DirecTV, should that deal happen hypothetically what type of additional opportunities could you see with the new product segment given your partnership with the carrier? Thanks a lot.

Thank you, Amir. Welcome to the call. Tony before I get started – before you get started, I would just say two things that are important from our Analyst Day last spring one of which was how highly fragmented the AT&T dealer base is. It’s extremely fragmented and you are talking thousands of stores in the hands of hundreds of dealers. So one of our roles here is to consolidate and improve the execution of those dealers. The second part is the whitespace where they don’t have distribution we are trying to play a role in that. Tony, you want to talk about the rest of this.

Sure. In terms of pacing, it’s been a very aggressive pace and it’s been a great partnership with AT&T and the exclusive relationship has really allowed us to drive this speed. Since September 2013, when we first engaged with Spring Mobile and AT&T we have expanded the store, the door count from 90 to 361, so it’s really the hyper-growth pace. And we are very productive either for AT&T and they see us that way. Not only are we one of the largest and the fastest growing but we are also one of the most productive and consistently score as one of the highest if not the highest in customer service ranking. So that’s allowed us to have an opportunity to help them consolidate the market. As we have mentioned earlier we did 16 acquisitions. And on average when we do an acquisition, we see a 30% increase in the business which is obviously good for us and good for AT&T. And I think you asked about markets where we were helping AT&T and are into where they may not be. And we have opened 123 stores and really through whitespace areas like metro locations and secondary markets. And then from a long-term growth perspective I think Rob you mentioned that we are going from $33 million of operating earnings to $170 million in 2019. So it’s a very, very relevant part of our business and will become an increasingly larger part of our earnings.

The other thing Amir, when you talk to our team Jason Ellis runs technology brands, Steve Bain runs Simply Mac, Brett Bradshaw runs Spring Mobile and Tommy Oakey runs cricket. When you talk to them about DirecTV they get excited about it, but we are already selling U-verse and we are selling digital live, I think in the half to two-thirds of our stores. So, we know how that process works. So, we look forward to the DirecTV sales. We look forward to the Mexico integration as well. So, it’s – I think that side of the business is very healthy.

Thank you very much for the incremental color.

Thank you.

We will take our next question from Colin Sebastian with Robert Baird.

Great, thanks. I think it’s first off in terms of the guidance, the margins look like they are in line within expectation and so looking at the difference between EPS and consensus versus guidance, I think there is roughly $0.15, Rob, maybe you pointed out from the facts and from the higher share counts. Just trying to keep together the other portion is that mostly the lower software sales number that you have versus consensus or is it more of the tax and the store closures, maybe you can clarify that? That’s the first question.

Within the models, there is a lot of things that move around, but when we boiled it down to what were the biggest impacts, it was FX, it was the share count, but the single biggest difference, which is why we addressed it in the way that we did was the projected software growth.

Okay. So, that’s the single biggest impact to the year versus consensus?

Yes.

Okay. I guess secondly as a follow-up on the capital allocation question, you have mentioned M&A a couple of times, so I just wanted to clarify how that might impact or any change to the way you think that might impact capital allocation for returning capital to shareholders?

Well, again, we are pretty confident that we can do everything we want to do from a tech brands expansion standpoint, a buyback standpoint and pay the dividend at $1.44 a share during the course of the year. Should something come across our plate that we believe drives the kind of returns that we are looking for, we would certainly discuss that at that time.

And the past year we have done what did you say, Rob, 16 transactions?

Right.

Those were highly accretive. And I think those are opportunistic in nature, we frequently will get a call from one of our partners, AT&T or Apple and they will guide us to someone who is looking to exit their business. So, those are the opportunities we got to take when we can. I think shareholders would want us to do that if the returns are higher than – significantly higher than our hurdle rates. So, otherwise they are going to be buying back and paying dividends.

Okay, thanks, Paul. And then lastly just another clarification on attach rates with and without digital, obviously a lot of us should know of where attach rates will be moving to over the course of the cycle. Can you maybe qualitatively talk about looking ahead where you would expect attach rates to move obviously a key where we can model your sales and your margins going forward? Thanks.

Tony, you want to talk about that where attach rates would go. I mean, one question there Tony might be how many titles actually have DLC versus we used to talk about which titles have DLC and which don’t.

Yes, just for clarification, Colin, you are talking about attach rate for console?

That’s correct, yes.

So, right now, GameStop has nearly 6 whereas the industry is at 4, so we are significantly outpacing the industry and that’s really what’s driven our share gains. So, I think what we have seen very quickly as we talked about earlier, we have seen a very quick acceleration of the installed base over 30 million units already are installed. So, it’s an incredibly quick progression. What we are seeing is when the new innovation comes out we are actually seeing a very strong pickup on that. So we expect to see an acceleration and I would anticipate that we would close that gap somewhat, you have talked about a gap and then it’s a little less than one unit per console and that’s when you add in digital are basically flat. So, I would anticipate that on the physical side we will close some of that gap versus the prior launch as the software actually catches up with the strength of the hardware launch.

Okay, great. Thanks a lot.

We will now take our next question from Mike Olson with Piper Jaffray.

Hey, good afternoon. Did you say that what you expect specifically next-gen software sales growth for the company will be in 2015 and then what you think your share of next-gen software sales will be in the year?

Well, what we said was we believe that there will be over 50%. Obviously, ranges imply different levels, but at the bottom end we see next-gen sales of software growing over 50%. And I am sorry, tell me the second part…

The market share.

The market share, our goal in everything that we do is to be dominant in the videogame category. So what we have seen thus far is software share hovering around one out of every two games that gets sold for a next-gen console. And our teams across the globe are focused on continuing to drive our market share.

Okay. And then gross margin was very positive in the year, what do you expect for gross margin in ’15, I guess what you are expecting for new software versus kind of what you are expecting on the tech brands side, should it continue to improve or will legacy gen weakness for new software potentially bring gross margins down year-over-year?

Well, we didn’t give specific guidance on where we see the gross margin rates, but directionally we would expect that we will have a shift during the next year from hardware into software on the videogames side of things, so that is beneficial to margin. And then we will continue as we have talked about to aggressively grow tech brands and we know that that is margin accretive. So we think we will see a good margin a year ahead.

Alright. Thanks very much.

A record gross margin year end. Thanks mike

Our next question comes from Arvind Bhatia with Sterne Agee.

Thank you, guys. Couple of questions here, first one is on the next-gen and the downloads that we are seeing you provided a nice slide there, just wondering what your learnings are from the PC download market that you are going to apply to downloads on consoles. Second question is wondering what your model assumes for hardware units for next year and in 2015 versus 2014. And then last question is on not tech brands, wondering if your 2016 targets that you provided we should still look at that as well as we look at the long-term targets? Thank you.

Well, that’s an interesting question. Let’s see, Tony you want to start on the next-gen downloads?

Sure. I mean on the next-gen downloads as we talked about, when you look at the actual amount of paid downloads it’s still 2%. So I think we have always said that there will be an increase in the amount of digital and that’s been very clearly stated in our market model, so we anticipate that we will see that. As per learnings from the PC digital side that you asked about you will and we see right now – as we see an incredible increase taking place in the PC side as people are coming into the business. I think it’s important to remember that on the PC side of the business historically there has always been DRM limitations that have a significant restriction on pre-owned. And so you really didn’t have the residual value that you do in the console side of the business. So I think that that’s one important thing that you have to realize about the console side of the business is that that $20 residual is in the mind of the customer is really important piece of the business. Rob over to you?

Yes. In terms of the hardware units, the comment that I made in the script was that we see growth, slight growth in next-gen hardware. I was speaking in terms of dollars and you may think about it that we have to overcome the price point on the Xbox One for the entire year relative to where it’s not in November I think of last year and pretty much held there through the fourth quarter. So that would imply a slightly larger increase in units for that. And again, we don’t forecast any sort of price declines on hardware until we absolutely know something and we don’t know anything right now. So you asked about 2016 tech brands target, and what I would say to you is at the beginning of last year when we laid out our 2016 goals for tech brands with respect to revenue we were in very early days of the next program. And as we have discussed in the past the next program as Paul just mentioned it a few minutes ago changes the dynamic of how we recognize revenue. So, I would think in terms more of what we talked about today on a long-term basis such that almost $1.5 billion in revenue by the end of ‘19. And I would say to you that, that is formed based upon how the programs work today and they move around. For us, what we are more focused on is the operating profit. And we will see that growth as we go from the $33 million that we did this year, up to the target that we laid out for you for ‘19. I would rather not specifically say how that might have changed the target we have previously laid out for ‘16. Candidly, I don’t have that information in front of me.

Okay, that’s very helpful. Thank you, guys.

Thank you.

At this time, we have time for one final question. Our final question today comes from Tony Wible with Janney Capital Markets.

Thanks guys. I was wondering how much of the digital that you are now selling happens in-store versus online. And if I am reading this correctly the 42% share that you guys referenced that’s just DLC, so I was wondering if you had that for full game downloads in addition to DLC?

Tony?

95% of what we sell Tony is sold in the store, both online. And in terms of the market share, that’s what Rob was talking about earlier, we do not have market share information on information beyond the downloadable content to add on downloadable content. That’s what Rob was talking about. We hope to share more information as it becomes available from DFC Intelligence for the future.

But Tony, one thing on that DLC, the reason – or digital generally the reason it’s so important to understand it’s sold and historically that’s the place that we discover, provide guidance to the customer etcetera. It’s not because we happen to have a lot of stores, because we could put all kinds of things online and they won’t get sold, because the customers have a hard time in this category discovering that product. So, that’s one of the reasons why we have so much store activity, yes.

Okay. And you guys are expecting to ramp a huge amount of tech stores this year, I was wondering if you can just give us a little bit of a sense on timing for that? Are you expecting kind of a smooth build-out in kind of conversion as you get to the RadioShack stores and other stores or should we expect some lumpiness with that? And then also I presume on the closings we might have some lumpiness and seeing maybe more closings in the first part of the year versus later?

Yes, I think that’s – Tony, you want to start with that?

Sure. Tony, what I would say is that with a wide space stores and obviously you know about the RadioShack stores and we have – we are obviously working those as Rob said feverishly right now to get those opened for those you understand and that may frontload actually – private frontload the amount of stores from a wide space and a RadioShack perspective. I would say the conversions will happen pro rata throughout the year and acquisitions will be probably the lumpiest part of that equation as those come from our partners at AT&T and then we are able to negotiate those.

Got it. Great, thank you.

Thank you, Tony.

Great, thank you Tony and thanks to everyone. Thank you for your support at GameStop. And we look forward to seeing everyone on the next call. Take care.