Good day and welcome to the GameStop Corporation's Fourth Quarter and Full-Year 2015 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 party without the prior written consent of GameStop. At this time, I'd like to turn the call over to Paul Raines, CEO of GameStop. Please go ahead.

Good afternoon, everyone, and welcome to GameStop's fourth quarter 2015 earnings call. We will start by thanking every single associate in our organization for extraordinary service and execution this quarter. This was a great quarter and year. And GameStop once again demonstrated that we will protect our family of associates, customers and investors going forward. Our senior staff on the call today are Tony Bartel, our Chief Operating Officer; Rob Lloyd, our Chief Financial Officer; Mike Mauler, our President of International; Mike Hogan, our Executive Vice President of Strategy and Business Development; and Matt Hodges, our Vice President of Investor and Public Relations. We just completed a strong quarter and year. Our year-end comps were 4.3% with overall sales growth of 0.7% or 5.4% in constant currency. We also posted an all-time record gross margin rate of 31.2%. These metrics rolled up into an all-time record of adjusted net income of $415.6 million. Adjusted diluted earnings per share were a record $3.90 before charges, up 12.4% from fiscal 2014. All-in-all, the year to be proud of. And before I go further, I want to invite all of our analysts and investors to our 2016 Investor Day here in Grapevine, Texas right by the Dallas Fort Worth Airport on April 13 and 14. Please contact Matt Hodges, or see our investor website for more information. We look forward to sharing our future expectations with you. I would like to separate my remarks into two buckets, transformation inside our core GameStop stores and transformation outside our GameStop stores. As you know, we now have several brands within the GME corporate family, many have asserted that our GameStop branded stores are in secular decline due to physical software decline. So, let me clear up that misconception with this interesting data point. In 2015,…

Thanks, Paul. Good afternoon. Today, I'd like to take you through a review of our Q4 and full year 2015 results, and then our 2016 guidance. I'd like this to serve as a pretty thorough review of last year, so that we can focus our time on Investor Day on April 14 on our future. So let's begin with some highlights from the quarter and the full year. We had record earnings, gross profit, and gross margin rates. Net income for the year was a new record of $415.6 million excluding one-time charges. Gross profit was a record $2.92 billion with a record gross margin of 31.2%. Overall results exceeded our expectations and our last guidance, due to increased operational effectiveness related to inventory quality and margin enhancement. We've reported our third consecutive year of positive comps. We guided to significant profit growth in Tech Brands in Q4 and we increased operating earnings 80% from $10 million in Q4 last year to $18 million excluding one-time charges in Q4 this year. We exceeded our Collectibles target of $300 million for the year with $309.7 million in sales. As you've heard, our goal is to have 50% of our operating earnings come from sources other than physical gaming by the end of 2019. In 2015, we had approximately 25% from non-physical sources like Digital, Collectibles and Tech Brands. Now, I'll dig in a bit deeper. Sales increased 1.4% in Q4 and increased 0.7% for the full year. Excluding FX, sales increased 5.3% for the fourth quarter and 5.4% for the year. The FX impact on sales was a $135 million and $430 million for the quarter and the year respectively. Comparable store sales increased 3.1% for the quarter and 4.3% for the year. U.S. comps were 3% for Q4 or 4.8%…

Thank you, Rob. As Rob and Paul stated, our fourth quarter performance showed the effectiveness of our diversification strategy as we drove growth both inside our GameStop branded stores and in our Technology brand segments. In spite of a decrease in physical software, our GameStop branded stores generated 3.1% comps due to the strong performance of digital collectibles and Omni channel sales as well as solid performance in our pre-owned business. Pre-owned sales increased 3% before FX and outpace software sales growth by 10 points as our strong trade programs provided in demand inventory sold well during the holiday period. As you can see in the supplemental deck on page 12 and 13, we continue to outperform new sales on both current-gen software and next-gen software. For the year, we also market share in software, hardware and accessories. This is the seventh consecutive year that we've driven software share increases. Despite market declines in software, we more than offset this loss in our GameStop branded stores with shared gains and the addition of our nonphysical videogame profits, which represented approximately 25% of operating earnings for the full year. As you can see on slide five, for the full year, we increased our store contribution in GameStop branded stores by nearly 15% year-over-year, and then the second year in a row that we have increased store contribution in spite of software headwinds. We also launched the first wave of DR with the PlayStation DR reserving most of our disproportionately high allocation. We see this as another vehicle that is upside to our future growth prospects, and we will share more about our plans to address this opportunity during our Investor Day. Now, let me walk you through the results for nonphysical gaming components; Digital, Collectibles and Technology brands. Digital receipts grew…

All right. Operator, I think we are ready for some Q&A.

Thank you. [Operator Instructions] And we'll take our first question from Colin Sebastian with Robert Baird.

Thanks guys, good afternoon. I have a couple of questions. First off, obviously you highlighted the full game downloads as an issue, and I wonder if there is any broader indication that the mix shift of downloads for AAA console games is expanding at a steady rate, or do you see any reason why that rate may change either accelerate or plateau. And then as a follow up on the comments on profitability and margins, obviously one of the core drivers of earnings is the pre-owned games business, but even though we saw 110 basis point decline in used margins year-over-year, the overall company's gross margins are increasing. So I wonder how sustainable that divergence is and if you also - if you expect to use margins to continue compressing? Thank you.

Tony, you want to take the first one?

Sure. On the full game downloads, Colin, I mean, we definitely do see, as we've talked about that Digital as increasing and we talked about the rate of growth, so we have increasing just like it is with the - at the publishers and we see 20% numbers come out on a fairly regular basis of launch, we saw that same number come out in Q4 of 2015 and that's come out in Q4 of 2015. So I think that they - that they are going to probably increase in the future beds, but it seems to be at a very - at fairly comparable level on a year-over-year basis.

As far as the divergence of the margins Colin, I mean, I think the - what we're trying to do is transition to a new set of metrics. The old metrics around GameStop were watching the pre-owned margin, watch the hardware penetration, where you're at in the cycle et cetera. Today, we just closed a year of record gross margins with pre-owned margin that was down, and I think that tells you a lot about where the business is headed, I mean our in-store Digital businesses and Collectibles businesses are driving significant margins accretion, not to say that we're going to neglect pre-owned margins. But we don't believe the pre-owned margins are tied necessarily to our overall gross profitability any longer. In fact, we think it's going the other way.

Okay. That's helpful. Thanks, Paul. And, Rob, just one quick one. How should we be modeling SG&A for 2016?

You should model it with respect to the Tech brands business. We'll give you more color on that I should say in Investor Day. But with respect to the videogame business or the GameStop branded stores, you can model the SG&A there to be declining year-over-year. We've put a lot of emphasis in our planning process around making sure that our cost structure was where we want to be for videogame part of the business as we face decline, and making sure that we then had the available dollars to invest in our growing business.

As you can imagine, Colin, it's difficult to transition a company like this, and Rob lead us through a process last fall in our budget cycle, we need to force cost out of the videogame side so that we can fund SG&A for the new businesses, and that's what we're doing.

Thank you.

Thanks, Colin.

We'll take our next question from Arvind Bhatia from Sterne Agee.

Hi. Thank you very much, a couple of questions. First, I wanted to maybe ask you about the virtual reality comment and I think you said you were somewhat cautious there. And then secondly, on the AT&T store acquisition that's pending, can you speak to the stores a little bit meaning, are these mature stores underperforming? How do they compare to - I think you had said $1 million per store was kind of the target for mature stores. So relative to that, how do these stores compare? Thank you.

Let me start off with the VR comment because I think it was my comment. We could spend this whole call talking about VR, so we can't do that. I got in trouble for talking about VR a while back on some issue of a release date. So, we - I don't think we can talk a lot about VR other than Tony, you're using up [Technical Difficulty].

We are definitely - we had a very strong allocation in PlayStation VR and we're through most of that allocation. We clearly have - are staying very close to all of the developments Arvind that are taking place. And as Rob shared, we're going to be very - as Paul shared, we're going to be very cautious on including that in our forecast until we really see a couple of things; A, what the production sites are going to look like, and B, what consumer demand around gaming is going to be. But every forecast that we - that is out there has a billion behind it. So, we note at some point it's predicted to be a multibillion dollar category and as it begins to mature, we'll be key to driving that category.

Anything you guys want to say about the AT&T?

Yeah. And on the AT&T store basis, obviously the acquisitions that we're doing are mature stores and we haven't disclosed for competitive purposes what we are paying on a per store basis. Mike, anything that you would add? Okay.

Thank you.

Thank you.

We'll take our next question from Mike Olson with Piper Jaffray.

Hey, good afternoon. I had a couple of questions. I heard you provide Rob the pre-owned guidance for Q1 of down low single digits. Did you or can you provide guidance for Q1 on new software and hardware?

Well, I think the guidance I gave for the full year on new hardware was down, and the guidance I gave on new software [Technical Difficulty]. I'd say probably, we are seeing numbers that are little higher than that in the first quarter. Our hardware would be probably a bit higher, we are facing that $50 lower price point. We have a strong 3DS launch with very high market share, a year ago and nothing comparable to that this year. And then the game slate is just different in Q1 than it was a year ago.

Okay. Got you. And then it be interesting to know, what kind of operating margin you see from overall non-physical versus physical, I think that would help us to get a sense for the mixed shift that's ongoing and how favorable it is, as we see more revenue coming from non-physical. Is the overall margin for physical versus non-physical, something you can share?

It is unfortunate, and so let's talk about that maybe at Investor Day. Unfortunately, Mike, I don't have that data in front of me to answer your question, now. So I'd need to answer it in a way that it can be heard broadly.

One thing you might look at Mike is the gross margins on these businesses are - is dramatically different. Our older businesses in new software, new hardware those are margins in businesses, and our new businesses of collectibles and digital are margin rich businesses. So as this Technology brands as a margin rich. So I think, we will give more detail in Investor Day that I think you've got a model in this as a fairly significant difference in terms of the marketing rate.

That makes sense. And one more quickie in here. Are you making a commitment to buy a minimum amount of cabin fire, are you committing to?

We're going to talk more about our capital allocation strategy at Investor Day. We will make a commitment to buy back stock. You can expect to see the same mix of things in terms of that we had this year. We're committed to a dividend at a $1.48 a share as Paul mentioned. We will buy back shares. We'll talk more about amounts at Investor Day. And we continue to believe beyond the two deals that we've identified that there are opportunities in the M&A space. So, more to come.

Okay. Thank you.

We'll take our next question from Anthony Chukumba with BB&T Capital Markets.

Good afternoon. Thanks for taking my question. Just wanted to focus a little bit more - excuse me, on Q1 in terms of the title line up and the fact that it's not as strong. Can you just remind us of some of the I guess the big titles that came out in Q1 of last year? And then, you mentioned that on Charters moving into Q2, but I was just wondering if there are any particular titles you're excited about for Q1 of this year. Thank you.

Tony?

Sure. Just to remind you on what came out in Q1 of 2015, Anthony, Dying Light, Evolve, Battlefield, Zelda: Majora's Mask, Bloodborne, Mortal Kombat, and GK5 last year was a big seller, where we sold over 300,000 units last first quarter. So, we still had a lot of residual [indiscernible] This year, I'm very excited about the division that came out for Cry Primal, Street Fighter, Zelda Twilight, and Dark Souls III. So, even just count the loan and you can hear that in terms of kind of large sellers for us there is a smaller amount.

Okay. That's really helpful. Thank you.

Welcome.

Can you say on the 3Ds zone?

On the 3DS, it was a - I think a $0.25 billion category while at least in the U.S. last year, and so clearly if you - we all saw NPD in February where it was - I think it was about half that amount in February alone. So, we anticipate that that's going to be tough rollover in the first quarter.

Got it. That's helpful. Thanks.

Sure.

We'll take our next question from Brian Nagel with Oppenheimer.

Hi, this is Dan Farrell on for Brian Nagel.

Hi Dan.

I was just wondering if you guys could provide a little more detail on the guidance for the upcoming year. What are the puts and takes I guess between the first quarter and the rest of the year? If you can provide any color I guess in the cadence throughout the year, as it kind of seems to imply an improvement in trends after Q1. I know you kind of called out the closing of some acquisitions in the back half but I was just wondering if there was anything else - any other color you can provide on that. Thanks.

Yeah. I think as you - we talked about the title line up in Q1 and how that sort of frames the Q1 guidance and as you look at the rest of the year and think about the full-year guidance, obviously those acquisitions are going to have an impact. We stated that we - we expect to close those by the end of July. So, those are Q3 and Q4 impacts, Tony talked about them being mature stores. So, you can imagine that they kind of roll right into the operations. Additionally, we continue to expand what we're doing in the Collectibles category in terms of both the square footage that's designated to Collectibles in GameStop stores. The programs that were I should say three things, the programs we're running on ThinkGeek.com and expansion of the Collectibles store base.

The other thing to remember to, Dan is that if you remember Q1 and Q2 last year, we had very significant growth in earnings per share, I think that Q1 was 58%, we went up - 59%, went up to 68% I think it was, and then Q2 it was even bigger than that it was a much bigger. Those are traditionally the lighter side of the year, traditionally for GameStop and last year they improved a lot. So we're overlapping pretty significant growth from last year as well. I think the back half will be very, very strong for us.

Great, thanks. And just a quick follow up. I know you talked about the title lineup in the kind of the first quarter. Any detail you can provide about the title lineup for I guess for the rest of the year and how that kind of is shaping up to compare to the current year?

Well, I think it's definitely brought into our negative 5% to negative 10% guidance, all that we know today. So I think all that we can say I think today will be a better statement honestly, because we know a lot that we're under NDA on a lot of the titles that we have, but I think I would agree with Paul's statement that Q3 and Q4 look to be stronger.

The way you got to think about it is certainly there is our traditional title lineups and we expect that we will get a Call of Duty, Madden, NBA 2K, and all those traditional titles. But remember now there is also IP that runs through our Collectibles, Mike Mauler, what if some of the IPs come in this fall.

There isn't really strong IP this year in the Loot category. We have Batman vs. Superman, Zootopia, Star Wars: Rogue One, the Walking Dead, some of the other shows like Game of Thrones. It's really interesting how they're filling kind of the gaps with the video game new releases. So, it's going to be a real strong year for Loot IP.

And then you got to add what are the iPhone launches coming and in our phone business. So, we've created this business where we have video game titles, but we've also got collectables launches and we've got phone launches and between all of that, that's where you see our guidance. We can't disclose all of it, but that's where you see our guidance for the year that we think it will be a healthy growth year.

All right. Thanks, guys.

We'll take our next question from Curtis Nagle with Bank of America Merrill Lynch.

Great. Thanks very much for taking the question. I guess just the first, you guys have dealt - touched on this a little bit, but how are you thinking about attach rates for new software this year? And then just a quick follow up, what was behind the decline in AP in the fourth quarter?

I'm sorry, the decline in AP?

ThinkGeek I think he said.

AP.

AP? Let me take that one first. If you look at the balance sheet, you can see a [indiscernible] crude liabilities, it's really the categorization of checks we cut and held at the end of the year, basically the accounting rules wouldn't let us keep that in the AP line.

And in terms of attach rates, we anticipate that again this year we will gain the share in all three categories hardware, software and accessories. So, we'll continue to outpace the market [Technical Difficulty].

Okay. Thanks very much. Appreciate it.

Right.

We have time for two more questions. We'll take our next question from David Magee with SunTrust.

Yeah. Hi, everybody.

Hi, David.

A couple of questions, first on the Tech Brand side, you mentioned doubling the operating income for the contribution from Tech brands before the acquisitions. I'm assuming that a big part of that is just having a full year impact of the stores that you brought on onboard last year. What would you say would be the rest of that not been achieved this year? That's my first question.

Okay. Okay. You want to take it?

I'll take that, David, we talked last year as we moved through the year about some of the costs that we incurred in terms of flipping GameStop stores into AT&Ts and flipping radio shacks towards into AT&Ts. So a portion of what you're getting is the fact that we don't anticipate having those kinds of costs this year. I think Tony mentioned, we intend to open 50 stores. So it's really a maturation of the store count that we opened last year again 233 that we flipped or opened last year and the ramp costs on those can be high. And then that the second aspect is as you mentioned, it's really just owning that yearend store count for the full year. In terms of the risks, we feel pretty good about that where we feel pretty good about the acquisitions, and what they are going to deliver to us in terms of operating earnings in the back half as well, and we're excited about the product launches that we see on the horizon.

The one thing to think about David too, is on the Tech brand stores, remember that you're not dealing with titles that may or may not sell or products that may go internet of bog et cetera these are telecommunications services that people have. Now, we are not just selling phones, we are also selling extended AT&T services. So DIRECTV has been a huge boom for us. We are going to sell every service that they have and that's one of the important things about that is why we stress that it's so important to have a partner like AT&T that's progressive right Tony?

Absolutely.

Just trying to build-out new services. So that I think mitigates the risk for us or de-risked that's filled out a little bit?

Absolutely.

Thank you for that. Do you think there is any risk that one or both of these deals could slip into the third quarter?

I don't think we can comment on that, right?

Yeah. I would say we - look at the disclosures we have in the risk sections of our documents. We try to look at the range of possibilities as we've talked to you about when we anticipate having those deals sort of in-house, and probably can't say much more than that. Other than I'll say David, I'm glad you noticed, we said we were going to double that profitability since each of us covered in our comments.

Let me make a point on this too David, it's not that there are only two deals to be done with AT&T dealers, there are many, many deals yet to be done. So, we will do deals, the question is which ones, where and how, but I think the risk of us not doing deals is pretty low.

Great. Thank you. And then just lastly, as you think about the new software guidance this year, I think you set down five to 10, can you sort of parse out what you expect new-gen to do - I'm sorry the next-gen versus the old-gen within that number?

Yeah. I would say we expect to see the kinds of declines in the prior gen that we have seen in recent years. Obviously the base becomes smaller. We talked about the impact of some of the 3DS stuff we saw last year. So, not having those kinds of launches has an impact as well. And within the next-gen, it kind of - as the old bases get smaller, it becomes about the next-gen and - I don't have the numbers right in front of me on what we expect there. But that business remains healthy for us and it's driving most of our new software sales now.

One of the difficulties, right Tony is trying to predict what Nintendo's going to do.

Okay.

Because historically, we are overlapping, as Tony mentioned earlier, big, big, big 3DS quarter in the first quarter, and so we don't have a lot of sales built into that. On the other hand, there is all kind of rumors about what they are going to do console wise in the back half, and so we've not put anything into that.

Right.

But, Nintendo's kind of a wildcard on the software.

Okay. Great. Thanks, Paul.

Thank you, Dave.

We'll take our last question from Seth Sigman with Credit Suisse.

Hey, guys.

Hey, Seth.

Thanks. Good afternoon. So, I wanted to follow-up on the used business. Just wondering, if you can elaborate on the inventory challenges that you were seeing, how you address that? And then ultimately, how do you see this business evolving given the outlook you provided for new software?

On the pre-owned inventories...

Inventories.

Sure. Like I said, we've got - the great news about that business is we control the input prices and the retail prices as well. And so, we have some great promotions that are out there that are - again they are not eroding margins, but they are targeting some of the definitely the games that we mean, so we see strong demand and we are after product, we did a great job in the fourth quarter of getting in demand products. And, while at the same time, selling through a lot of the 360 and PS3s you could see on the pages that we put in the deck. So we feel comfortable about our ability to grow inventory to meet the demand for pre-owned. And like Rob said, we are ahead of where we anticipated we would be at this point already for the operations team is doing an excellent job of going out and getting that product that we need. Also Paul, I think we're all talked - maybe around...

We all talk about the power - powerful words and one of the most powerful things about powerful words is its ability to go after that pre-owned great product that we need, we can really be surgical about talking with customers, individual customers about the product that they have in their libraries and we use that very effectively.

The challenge on that goal is not that there is not inventory in people's homes, it's that we got to find ways to motivate them to bring it in. You know and that's where, that's where [indiscernible]. Tony is right.

Yeah. Okay, thank you. And then just back to Tech brands, I wanted to clarify the 50% to 60% revenue growth that you're targeting, that's before acquisitions. So that's of the yearend sales base of I think it was $530 million or so is that the right way to be thinking about it?

That is the right way to be thinking about it.

Okay. So based on that number and then the operating earnings outlook that you provided, it would seem to imply a lower operating margins than the 10% that you've talked about in the past. Am I calculating that right, can you help me reconcile that?

Yeah, I think Rob I think that he is talking - he is probably talking about the fact that which is about the acquisition, how much you've included from the acquisition?

Yeah, I'm here running some math in my head. Yeah, I'd say it would be in the neighborhood of 10%. You saw 10% in the fourth quarter or you will see it when you [indiscernible] next week and you can see what the revenues were for Tech brand. I have to dig into some numbers Seth to go beyond that. But I think our expectation is that it would be at or near that. And then...

We'll address in Investor Day.

Yeah. We will come back to that in Investor Day.

Okay. Fair enough. Let me just sneak one in on Collectible since that's a big focus as well, the $300 million this year, that you're able to achieve. Can you give us a sense of how big that business was in 2014?

Yeah. Give me just a second.

It's - while these looking that up in 2014, and in 2013, we used to saw Collectibles as an ad-hoc that we used to call, what's the name we had from our...

Franchise.

...franchise marketing, where we would sell you assessments created to the typical one, we'll tell you the title, and then we'll tell you the blade, the plastic blade that will come out of your sleeve, but then, we got into it. What's that we [indiscernible] but, and then we got into it. What's the number of that?

Yeah. In 2014, it $75 million.

Okay.

And I don't know if everybody remembers, but last year on number of occasions on the earnings call, we talked about this being a business that could be $500 million in three years. And so, it's exceeded expectations this year, we could that it will be $450 million, and that was still a three years to go. So, it's growing fast, and it's a very good business for us.

The customer set is very close to our gaming customers set. By the way, if you look at the customers in our Collectible stores, that people who buy Collectibles, a lot of them are similar, not the same, but a lot of overlap in those customer sets.

Which is part of the - the opportunity, but I guess one of the questions that we're trying to understand is, how incremental that sale is. So, if someone coming in with an incremental trip to buy some of those products, or are you just doing a really good job of capitalizing on existing traffic?

I think that's a fair amount of increment. I'll tell you, remember that we sell Collectibles not just in the GameStop store. Although, that's an important source of revenue for the GameStop store, that's why our contribution per store is up 15% year-over-year et cetera. But, we also sell to Thinkgeek.com, we sell it in our own standalone stores as well.

And clearly, we're seeing strong returns from those standalone sales which is why we're expanding them.

Yeah.

Okay.

And that's clearly, the overlap between what we saw in the standalone stores and what we saw in our GameStop stores is extremely small, I think depending on the team [indiscernible].

Okay. Thank you.

Thank you, Seth.

Great. Okay. I guess with that, we'll wrap it up. I want to thank everybody for participation on the call. We had a record net income year, nobody mentioned that, but I will. We had a record net income year. So, thank you for joining us. And, we look forward to seeing everybody April 13 and 14 at the Gaylord Hotel in right here, just by DFW. You can catch an Uber from DFW and be there in 12 minutes. So, thanks a lot. Bye-bye.

That does conclude the presentation. Thank you for your participation.