Take-Two Interactive Software Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2022

There are 16 speakers on the call.

Operator

Greetings, and welcome to Take Two's First Quarter Fiscal Year 2023 Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Nicole Chevins, Senior Vice President of Investor Relations and Corporate Communications.

Speaker 1

Good afternoon. Thank you for joining our conference call to discuss our results for the Q1 of fiscal year 2023 into June 30, 2022. Today's call will be led by Strauss Zelnick, TakeCare's Chairman and Chief Executive Officer Carl Sladeff, our President and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q and A session following our prepared remarks. Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts or considered forward looking statements under federal securities laws.

Speaker 1

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 update these forward looking statements. Actual operating results may vary significantly from Forward looking statements are based on a variety of factors. These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10 ks Quarterly report on Form 10 Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that unless otherwise stated, All numbers we will be discussing today are GAAP and all comparisons are year over year.

Speaker 1

Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non GAAP financial measure to the most comparable GAAP measure. In addition, we have posted to our website a slide deck It visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at hastycains.com. And now, I'll turn the call over to Shao.

Speaker 2

Thanks, Nicole. Good afternoon and thank you for joining us today. I'm pleased to report that fiscal 2023 is off to a great start, Highlighted by 1st quarter net bookings of $1,000,000,000 Our performance demonstrates the quality of our games and our ability to engage audiences across the globe Despite the impacts of various macroeconomic and geopolitical factors, this has been a milestone period in the history of our company as we closed our combination with Zynga. This transaction firmly establishes Take 2's position as one of the largest pure play interactive entertainment companies in the world. We're home to the industry's top creative talent and we own and control an exceptional diverse portfolio of intellectual properties encompassing all key platforms And genres.

Speaker 2

We're exceedingly optimistic about the long term growth potential for the mobile industry as well as our ability to create greater shareholder value as a Combined entity. Over the past few months, we've made significant progress in our integration efforts. Zynga, which is being run by the label's President, Frank Gibeau, established its ongoing leadership structure. Alongside Frank, we're fortunate to have numerous proven senior executives who will be instrumental in overseeing Zynga's day to day operations and taking our combined mobile business to the next level of success. The integration of our corporate functions and systems has been tracking well and we're pleased that our day one plans were executed seamlessly with no disruptions to our business operations or player communities.

Speaker 2

While it's still early, we're confident that we can realize $100,000,000 of annual cost Synergies within 2 years post close and we're exploring additional areas of efficiencies. Our creative teams are in active discussions about potential projects And we remain committed to delivering over $500,000,000 of annual net bookings opportunities over time. There are several meaningful drivers in mobile that we believe our teams can begin to activate this fiscal year, including implementing new bold beats, Driven by new content and other live service enhancements, user acquisition optimization, creating a centralized library for development technologies and tools, Enhancing the monetization of in game advertising and continuing to invest in our ad tech platform with Chartboost. Over the intermediate and long term, our vision is to introduce mobile games for some of our most popular and proven intellectual properties that have the potential to be greatly additive to our We've observed positive signs that some mobile players are looking for more sophisticated and immersive content and we look forward to participating in this trend that should continue for the foreseeable future. We also see a tremendous opportunity to establish more meaningful presence in key mobile first Emerging Markets.

Speaker 2

Turning to our Q1 results on a pre combination basis. Our net bookings of $731,000,000 were Within our previously stated outlook range, led by the outperformance of NBA 2 ks22 and WWE 2 ks22, Zynga's offerings complemented our results significantly for the period. NBA 2K22 continued to dominate as the industry's leading Call game with sell in of over 12,000,000 units to date, exceeding the series sell in from the prior year. During the Q1 engagement with the title remained strong with Average games played per user increasing 16% year over year. In addition, NBA 2 ks22 Arcade Edition remains the number one game in Apple Arcade since launched in October 2021 and downloads of NBA 2 ks Mobile remained robust, driven by the courtside pass updates and content surrounding the NBA playoffs and finals.

Speaker 2

Our partnership with the NDA remains incredibly strong and we look forward to the launch of NBA 2K23 in September. Throughout the Q1, 2 ks and Visual Concepts released a series of DLC packs to support WWE 2K22, Which brought even more fan favorite superstars into the ring for what has been hailed by critics and consumers alike as our best WWE offering in the series. Engagement with the title has been outstanding with more than 330,000,000 in game matches played and over 8,500,000 hours of WWE 2K22 content viewed on Twitch. We greatly value our partnership with the WWE and we're thrilled about the long term opportunity to grow the franchise further together. Rockstar Games capitalized on the momentum from last quarter's releases of Grand Theft Auto V for PlayStation 5 and Xbox Series X and S, Grand Theft Auto Online standalone and the launch of GTA Plus as the experience continues to captivate players.

Speaker 2

Latest generation console players of Grand Theft Auto Online grew over 40% this quarter and are monetizing at a rate 36% higher than players on the previous generation. GTA Plus, the premium membership available exclusively on those consoles, has seen consistent growth since launch. The GTA Online community remains strong and its audience size is operating in the new normal that is 49% higher than the pre pandemic Q1 of fiscal 2020. Sales of Grand Theft Auto V also remain strong and to date the title is sold in nearly 170,000,000 units. With development of the next entry in the Grand Theft Auto series well underway, the Rockstar Games team is determined once again to set creative benchmarks for the series, industry and for all entertainment, just as the label has done with every one of their frontline releases.

Speaker 2

We were also pleased with the performance of Red Dead Redemption 2, which continues to expand its audience and to date has sold in more than 45,000,000 units worldwide. Timey Team as Wonderlands exceeded our expectations and continue to sustain healthy player engagement due in part to its robust Post launch of content, which will continue throughout the fiscal year. The title has resonated with core fans and new audiences with nearly 40% of players having never before played a Borderlands title. Additionally, Tiny Tina's Wonderland launched on Steam in June alongside its previously released DLC offerings. Also in June, 2 ks and Supermassive Games launched The Quarry, an all new horror narrative game, where every choice, big or small, shapes your story The title launched the strong reviews with NPR declaring it this summer's best horror game And Variety calling it every horror fan's dream video game.

Speaker 2

And Private Division released Void Riders, the first expansion for their critically acclaimed skateboarding The expansion earned at 87 on OpenCritic, which was even higher than the base game's excellent review scores. Private Division will share more details regarding the game's second expansion later this year. Recurrent consumer spending rose 48% unaccounted for 73% of net bookings. This was significantly above our prior guidance due to the inclusion of Zynga for part of the quarter, which was not included previously as well as outperformance from our core portfolio. During the period, Zynga We delivered significant growth in advertising net bookings, which was offset by some pressure on in app purchases due to current macroeconomic conditions And seasonality.

Speaker 2

Some key highlights of our mobile offerings during the quarter include Harry Potter Puzzles and Spells featured an in game event to celebrate the cinematic release The Secrets of Dumbledore. Empires and Puzzles introduced the game's 5th season, Dying the Sea of Dunes. Zynga Poker released the Omaha update giving players a new way to enjoy the popular game. Words With Friends introduced clubs, a new feature that games in the quarter and Color Runners reached the number one top free downloaded games position in the U. S.

Speaker 2

App Store in June. Turning to our outlook, we now expect to deliver net bookings of $5,800,000,000 $5,900,000,000 which includes Zynga for part of the year. Our pipeline for the year continues to look very strong and we're excited to expand significantly our mobile presence with the best in class platform. Our new forecast also takes into account some movement in our release slate for the year, foreign currency pressures and macroeconomic uncertainty. Lainie will provide more details shortly.

Speaker 2

Looking ahead, our long term vision is clearer than ever and we believe that our combination with Xynga will enable us to on the evolving dynamics of the interactive entertainment industry. As we deliver our expansive, diverse pipeline and pursue the vast opportunities that we've identified through our combination with Zynga, we see a path to engage even greater audiences around the world, grow our scale I'll now turn the call over to Carl.

Speaker 3

Thanks, Ross. I'd like to begin by thanking our teams for a great start to the year driven by their tireless passion, creativity and commitment to deliver the best entertainment experiences in the world. I'll now discuss our recent releases. On July 7, 2 ks and Supermassive Games launched an update to the popular horror experience, The Quarry, which introduced Several new features, including Wolfpack, a new online multiplayer mode where the host can invite other players to help shape the story as a collaborative group. In addition, all 6 episodes of the Bizarre Yet Bonafide podcast featured in Macquarie are now available in game and in their entirety.

Speaker 3

The podcast, which was previously available only on select streaming platforms, follows 2 fictional paranormal investigators as they delve into the troubling On July 19, 2 ks and Visual Concepts will be the 5th and final DLC pack for WWE 2 ks22 entitled The Whole Damn Pack. The update features pop culture icon Machine Gun Kelly, social media megastar Logan Paul And high flying, hard hitting WWE Hall of Famer Rob Van Dam alongside franchise debuts from LA Knight, Zai Ali, Hammadar Adi and Sarai. We are very proud to have delivered such a stellar WWE offering this year to support the title with our fans' most beloved superstars. On July 26, Rockstar Games A sweeping update bringing new business prospects for criminal careers, plus new elaborate contact missions, auto showrooms to test drive and purchase vehicles and many other upgrades rolling out all summer long. The update also delivers highly requested experience improvements as well as increased payouts We remain incredibly excited about our pipeline for fiscal 2023 and beyond.

Speaker 3

On August 16, Private Division and Roll 7 will release Rollerdome, a brand new third person single player shooter. This stylish High Octane Game combines adrenaline fueled skate stunts with intense combat in a retro futuristic world. The title will be available on Steam PlayStation Plus members for an introductory price just under $20 after which it will retail for 29.99 Additionally, PlayStation Plus Premium members will be able to play a free trial of the game when it launches. On September 9, 2 ks and Visual Concepts will launch NBA 2K23, the next offering from our industry leading NBA series. Phoenix Suns Shooting Guard 3 time NBA All Star and 2020 onetwenty 2 Kia All NBA First Team Selection Devin Booker is featured on this year's The iconic Michael Jordan appears on the cover of the NBA 2 ks23 Michael Jordan And the brand new NBA 2 ks23 championship edition, which retails for $149.99 and delivers incredible value by including a 12 month subscription to the NBA League Pass for the first time.

Speaker 3

In the U. S. And Canada, players can purchase the WNBA edition as a GameStop exclusive featuring Phoenix Mercury Superstar Diana Taurasi Along with Seattle storm legend, Sue Bird, TUTEC has partnered with Every Kid Sports to support greater representation of females in basketball 2 ks will reveal more details of NBA 2K23 in the coming weeks. We've made the decision to move back Marvel's Midnight Sons to ensure the teams of Firaxis Games and 2 ks deliver the best possible experience for our fans. The title will launch later this year On Windows PC, Xbox Series X and S and PlayStation 5.

Speaker 3

The Xbox One, PlayStation 4 and Nintendo Switch versions will follow During the Q4, Private Division and Intercept Games will launch Kerbal Space Program 2 on PC. The game's dedicated community can look forward to more information about the game and its new features from the title's ongoing gameplay reveal video series. 2 ks's teams at Visual Concepts at HB Studios remain hard at work on their upcoming launches of WWE 2 ks23 and PGA Tour 2 ks23. 2 ks will have more to share on these annual sports offerings shortly. Zynga has a handful of games that are currently in soft launch with more on the horizon and we expect some of these titles will begin launching worldwide in our next fiscal year.

Speaker 3

This includes Star Wars: Hunters, We're continuing to regularly roll out new content updates and features as it progresses through to a more mature phase of soft launch in strategic territories. At the same time, Wallet will continue to release a high volume of mobile titles as it has done previously. Turning to esports, the NBA 2 ks League Championships tip-off will take place in Indianapolis at The Pavilion at Pan Am with 3v3 Play August 17 through 20 and 5v5 Play August 24 through 27. We remain excited about the continued success In closing, we believe that our company today is the strongest and most diverse it has ever been, With approximately 11,000 of the industry's best and brightest talent, the most exciting and commercially successful portfolio of owned intellectual property and the ability to deliver Deeply captivating and engaging entertainment experiences on any platform anywhere in the world, we believe that we are well positioned to deliver long term value for our shareholders. I'll now turn the call over to Lainie.

Speaker 4

Thanks, Carl, and good afternoon, everyone. Today, I'll discuss the key highlights from our Q1 Before reviewing our financial outlook for the fiscal year 2023 Q2, please note that our first quarter results include Zynga's financial performance for 39 days of the quarter, which impacts the comparability of our results relative to last year as well as to our prior guidance, which did not include the contributions from Zynga. Also, any references to Take 2's pre combination results are referring to our financial performance, excluding the acquired Zynga business. Additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, this was a momentous quarter for our organization as we closed our transaction with Zynga and made significant progress on our integration efforts.

Speaker 4

Our teams created detailed plans to realize at least $100,000,000 of annual cost synergies and we continue to expect approximately $50,000,000 to be achieved within the 1st 12 months post close. The largest opportunities include reducing duplicative corporate overhead and contracts, Consolidating systems, rationalizing our real estate footprint and leveraging Zynga's marketing functions across our other mobile titles. We are also exploring additional areas of efficiencies. At the same time, we delivered strong first quarter results Driven by net bookings of $1,000,000,000 On a pre combination basis, our net bookings were $731,000,000 which grew 3% compared to last year and are within our guidance range of $700,000,000 $750,000,000 The movement in foreign currency exchange rates negatively impacted our net bookings by approximately 1%. We were also pleased with Zynga's contribution for part of the quarter.

Speaker 4

With consumers today navigating various Macroeconomic and geopolitical factors, we believe that our financial performance truly demonstrates the resiliency of our business model, driven by the incredible quality of our games and the significant value that our interactive entertainment experiences provide our players. During the period, recurrent consumer spending rose 48% and accounted for 73% of net bookings. This is significantly above our prior guidance due to the inclusion of Zynga for part of the quarter as well as the outperformance of our pre combination portfolio led by NBA CK22, Tiny Tina's Wonderland and Top Eleven. Literacy delivered net bookings increased 41% and accounted for 95% of the total. During the quarter, 77% of console game sales were delivered digitally, up from 73% last year.

Speaker 4

GAAP net revenue increased 36 percent to $1,100,000,000 and cost of revenue increased 32% to $436,000,000 which included a $20,000,000 impairment charge related to our decision not to receive a further development of a title from an unannounced new franchise. Operating expenses increased by 125% to $704,000,000 primarily driven by the addition of Zynga and a full quarter of Nordea, business acquisition costs and higher personnel and marketing expenses. And our GAAP net loss was $104,000,000 or $0.76 per share, which was largely impacted by $117,000,000 of amortization of acquired intangibles and $165,000,000 of business acquisition costs. Our GAAP net loss benefited from a reversal of expense of approximately $48,000,000 related to corporate shares of the previously granted stock awards. In the Q1 last year, our GAAP net income was $152,000,000 or $1.30 per share.

Speaker 4

Our management tax rate for the period was 18% as compared to 15% in the prior year as a result of our combination with Zynga. On a pre combination basis, our management results, excluding the impact of the Zynga transaction exceeded the high end of our guidance range by $0.06 despite the impairment charge taken during the quarter and the higher tax rate. We ended the quarter with over $1,300,000,000 of cash and short term investments and $3,300,000,000 of debt. Turning to our guidance, I'll begin with our full fiscal year expectations. As Shao Nanjing, we are initiating new guidance that includes our combination with Zynga for approximately 10 months of our fiscal year.

Speaker 4

We now expect to deliver net bookings of $5,800,000,000 to $5,900,000,000 Our assumptions take into consideration some shifts in our pipeline for the year as well as movement in foreign exchange rates and the uncertain macroeconomic backdrop. The largest contributors to net bookings are expected to be NBA 2 ks, Grand Theft Auto Online and Grand Theft Auto V and Pirates and Puzzles, Wallet's Cyber Casual Mobile Portfolio, Tomb Glass and Red Dead Redemption 2 and Red Dead Online. We expect the net bookings breakdown from our labels to be 45% Zynga, which includes the former T2 Mobile titles, 37% 2 ks, 17% of Rockstar Games and 1% Private Division. We forecast our geographic net bookings split to be about 60% United States and 40% international. We now expect recurrent consumer spending to grow approximately 110% and represent 77% of total net bookings.

Speaker 4

Our digitally delivered net bookings are expected to grow by approximately 80% and represent 96% of net bookings. Our forecast assumes that 74% of console game sales will be delivered digitally, up from 68% last year. We expect to generate more than $700,000,000 in non GAAP adjusted unrestricted operating cash flow, and we expect to deploy approximately 135 $1,000,000 for capital expenditures. We expect GAAP net revenue to range from $5,730,000,000 to $5,830,000,000 And cost of revenue to range from $2,740,000,000 to $2,790,000,000 which includes approximately $700,000,000 The amortization of acquired intangibles. Total operating expenses are expected to range from $3,370,000,000 to $3,800,000,000 as compared to $1,500,000,000 last year.

Speaker 4

This increase reflects the inclusion of Zynga, This is acquisition costs and higher personnel, marketing and IT expenses, which is slightly offset by our anticipated cost synergies for the year. And we expect the GAAP net loss ranging from $398,000,000 to $438,000,000 or $2.50 to $2.75 per share, which assumes a basic share count of 159,200,000 shares. We expect our management tax rate to be 18% throughout the year. Now moving to our guidance for the fiscal Q2. We project net bookings to range from $1,500,000,000 to $1,550,000,000 compared to $985,000,000 in the Q2 last year.

Speaker 4

The largest contributors to net bookings are expected to be NBA 2 ks, Grand Theft Auto Online and Grand Theft Auto V, Empires and Puzzles, SOLID's hyper casual mobile portfolio and Tomb Life. We project recurrent consumer spending to grow approximately 85% and digitally delivered net bookings to increase approximately 70%. Our forecast assumes that 73% of console game sales will be delivered digitally, up from 65% last year. We expect GAAP net revenue to range from $1,370,000,000 to $1,420,000,000 and cost of revenue to range from $700,000,000 to $790,000,000 which includes approximately $200,000,000 of amortization of acquired intangibles. Operating expenses are expected to range from $849,000,000 to 8 $59,000,000 At the midpoint, this represents a 125% increase over last year.

Speaker 4

This increase reflects Inclusion of Zynga and business acquisition costs as well as higher marketing and personnel expenses, which we believe will be slightly offset by the realization of some of our anticipated cost synergies. And GAAP net loss is expected to range from $144,000,000 to $160,000,000 or $0.86 to $0.96 per share, which assumes a basic share count of 166,400,000 shares. In closing, we had a great start to the year. We believe that our coffee kitchen with Zynga will enhance our positioning as one of the top interactive entertainment companies in the world. As our teams continue to leverage the core competencies from Zynga's publishing platform, we believe that we will be able to engage our player base more deeply, add new dimensions to our existing portfolio and deliver significant long term growth and margin expansion for our shareholders.

Speaker 4

Thank you. I'll now turn the call back to Jeff.

Speaker 2

Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for delivering an excellent start to the year. And to our shareholders, I want to

Operator

Before pressing the star keys. Our first question comes from Eric Handler with MKM Partners. Please proceed with your question.

Speaker 5

Good evening and thanks for the question. Two questions. First, Lainie, I wonder if you could sort of size The changes in guidance in terms of how we might have been thinking about Marvel's Midnight Sun versus What's changed with FX and macro?

Speaker 4

So for the difference in the pre combination business, We had some shifts in the pipeline for the year and then there was a movement in the foreign exchange rates and then there's also the uncertain macroeconomic backdrop. So I would say that The shifts in our pipeline were the most meaningful to our numbers. So I would say, we had some titles that moved within the year, And that was Marvel Midnight Sun. And then there was an unannounced title that moved out of the year as well. So I would say it's definitely the Pipeline changes that were the most meaningful to the change in the guidance.

Speaker 5

Great. Thank you. And then Strauss, I wondered if you could talk a little bit about the state of the mobile industry right now. There has been a little bit of headwinds with growth for the industry in this year. And wondering as you look at Zimna's portfolio, and combining it with your portfolio, How fast can you integrate sort of the ad network?

Speaker 5

Are things changing relative to What you were thinking maybe at the time the acquisition closed or maybe even when you first made the acquisition?

Speaker 2

Thanks, Eric. There's a lot there. We are seeing some softness in the mobile market. The good news is I think we're doing better than most, If not all, and I think we're seeing an offsetting increase in our market share. I think the reason we're seeing probably a bit more softness in mobile than in console is in console to You have to buy and in mobile by definition you're in a free to play environment and you can play without paying.

Speaker 2

And if you are feeling the pinch of inflation Specifically with regard to non discretionary expenditures like fuel and food, you could imagine that if you're playing the game, you might choose to spend a bit less or spend a bit less frequently. That said, we think Zynga's highly diverse portfolio of terrific games is a meaningful offset. And as I said, I think we're Performing the market, that's our belief. We're also seeing growth in advertising revenues. And because I think we under index in advertising, that's an opportunity That will be offsetting to the broader market even if we see ongoing softness.

Speaker 2

But as you know, we always call it the way we see it. And what we're seeing is overall some softness in the marketplace. When you have 50% of big bank economists saying, we think we might be in a recession in the next Quarter or 2, my attitude is that the market believes we're in a recession right now. And as a consumer facing company, we are seeing some softness. With regard to the integration, I'm not sure you asked about how it's going, but it's going really well and we expect to Meet or exceed our cost synergy expectations, both in terms of magnitude and timing.

Speaker 2

And more importantly, we fit really well together culturally. And I think all of us at Zynga and now all of us at Take 2 are very excited about the combination of where things are going And how well the teams do fit together. And we had a sense of that during the diligence period, but it's always nice to know post closing that that's the case. And I think you alluded to whether we can sort of create one broader integrated platform. As you know, T2 Mobile Games has been folded into the Zynga division, which is operated by Frank Chabot and his team highly independently and one of their key priorities is to create an integrated platform that will bring the best In all of our games, so enhance our acquisition and enhance our conversion, enhance our retention, enhance our lifetime value And also Enhance, as I said, our advertising revenue.

Speaker 2

Zynga has a proprietary ad tech platform driven by their Chart Khrush division and we're excited about what that can bring to Zynga and also bring to all of Tate too.

Operator

Our next question comes from Matthew Thornton with Truist Securities. Please proceed with your question.

Speaker 6

Hey, good afternoon. Thanks for the question. Maybe

Speaker 7

2 if

Speaker 6

I could. First one, Lien, I'll be wondering if you'd be able to give us what the RCS percentage of bookings It was for legacy Take 2 for the quarter. I think it was 73% total with Zynga. I'm curious kind of what that number was without for the quarter. And then just secondly, Strauss, any movement in the out year pipeline, if we think about how things are progressing and developing, I guess, what's your General sense about progress maybe when we last talked 3 months ago, that'd be helpful.

Speaker 6

Thank you.

Speaker 4

In terms of the RCS, for the pre combination, we're not really breaking that out anymore. We're really looking at the business overall as one business. But I can tell you that, we did outperform on NBA 2 ks22, Tiny Tina's Wonderland and Top Eleven versus our guidance for the quarter. So those three titles did better than we had expected.

Speaker 3

And in terms of the pipeline, yes, as Blayne mentioned, we did have Number of titles have affected our pipeline and some of our results for fiscal 2023. Generally speaking, we obviously don't take these shifts lightly. We have seen them before. The most important thing for us is always to put out the best game we possibly can Because that's what builds franchise value and ultimately that's what drives the success of our organization. So it's worth the wait.

Speaker 3

Typically, that is the best economic decision that we can make. And I would say that I'd characterize the Pipeline shifts as well. These things do move around and you may have that may affect a specific year. It hasn't really changed Our overall perspective on the growth in the intermediate or long term.

Operator

Our next question comes from Matthew Cost with Morgan Stanley. Please proceed with your question.

Speaker 8

Hi, everyone. Thanks for taking the questions. I have 2. So I guess just kind of following up on the chart boost point. I think you mentioned in the prepared remarks and then Now in the Q and A about leveraging those marketing capabilities inside Zynga across other titles.

Speaker 8

I guess, what are you envisioning that looks like? And is that Something that can be used to promote titles or cross promote titles on PC and console in addition to mobile. And then just on the commentary, I think in the press release about the $500,000,000 Synergies, now that you kind of have your hands dirty, you've gotten under the hood with Zynga, Do you have a sense of how long it will take to establish feasibility and start working through those projects to get a sense of how long they might take? Is it 5 year process to get those done, what might that timing look like? Thank you.

Speaker 2

Thanks. Look, I think to the extent that Zynga succeeds in building a robust ad tech platform, Then it will affect all of our live services businesses, not just Zynga's live services businesses, and we're really optimistic about that. To be clear, We haven't baked any of that into our cost synergy expectations. And as you know, we've not included our revenue synergy expectations In our forward looking projections. So that's all upside if we're able to achieve that.

Speaker 2

But I feel very good about the exercise. And yes, it will cross over to the Yes, it will cross over to the entire company's live services offerings. In terms of the timing for new projects, Very hard to call that now. There's a lot of excitement internally. We're working on a lot of interesting potential ideas.

Speaker 2

And certainly the development for mobile is much quicker than it is for console, but it would be premature to stay in a particular time. And of course, All product announcements do come from our labels.

Operator

Our next question comes from Mario Lu with Barclays. Please proceed with your question.

Speaker 9

Great. Thanks for taking the questions. The first one is just A follow-up on the full year guidance, the updated one with Zynga. Just hoping if you could help kind of clarify What items are kind of moved around within the Zynga side? I know the Star Wars hunters got pushed back.

Speaker 9

Sounds like macro weakness deepened a little bit. So any other color you can provide in terms of the Zynga side would be great.

Speaker 4

Sure. There were some movements in their pipeline. There was some changes in the FX rates. The Russia sales were removed from their financials and then also there were some overall ad market The ad market has experienced some pressure. So those are most of the changes that we saw in their numbers over the last few months.

Speaker 9

Okay. And then follow-up on the recurrent consumer spending. I just wanted to make sure, for mobile Advertising revenue, that's all included, right, in RCS or is that categorized somewhere else?

Speaker 2

Yes, it is indeed.

Operator

Our next question comes from Doug Creutz With Cowen, please proceed with your question.

Speaker 2

Yes. First, I was just wondering if you're willing to share what Zynga's pro form a rev would have been for the And then secondly, Google is implementing some advertising formatting changes, and there's been some speculation that this could Negatively impact the hyper casual ad business. Just wondering what your take is on that. Do you see any risk there? Is this something you think you can manage through?

Speaker 2

Thanks.

Speaker 4

So we're going to manage their business as one combined entity. So therefore, we're not going to break out The Zynga piece for the quarter, so it's not been our practice to break out our results for the with our prior acquisitions. So we're not going to do that here as well.

Speaker 2

And with regard to a change in ad formats with Google, I don't have a point of view yet about That may or may not affect us, I would say we're not concerned at the moment.

Speaker 5

Okay. Thank you.

Operator

Our next question comes from Omar Dorsky with Bank of America. Please proceed with your question.

Speaker 10

Hi. Two questions. So just a little bit of clarification on the business plan for Chartboost specifically, could you clarify whether you're intending to turn that into A 3rd party broker advertising network that cross promotes 3rd party games on 3rd party ad inventory, similar to companies like IronSource, AppLovin or Unity or it's more of an internal advertising technology tool? That's my first question.

Speaker 3

So in terms of Chartboost, Chartboost does actually deal with 3rd parties today. We certainly haven't announced any changes. But that is one area that we're very excited about. Look, the bigger the business is, the more valuable the platform is going to be. It's going to be certainly valuable from a tech perspective internally, But we think it's a great product and whether or not it's got great growth prospects to the 3rd party market remains to be seen, but that's certainly something that we're that is under consideration.

Speaker 10

Okay. Thank you very much. And then the second question is, with regards to the mobile game market and specifically, the Zynga assets, If you think about what your outlook for the growth in the expense base was in January When you announced the acquisition versus what you're guiding today, Is it about the same? Is it significantly lower, given that in the first half of the mobile video game market seems to have not performed terribly

Speaker 4

In terms of the changes in the in our guidance, it's when we're looking at our OpEx, There's an increase in terms of our expenses from Zynga. But then also in terms against our guidance, We have some lower marketing and some lower headcount expenses due to less New hires due to timing. So that's the big changes between our operating expenses between this guidance and last guidance.

Speaker 3

And on the revenue side, obviously, there are some things that are happening in the short term that Lainie and Strauss have already spoken about that can affect What our expectations are, where they are today in the short run versus where they were in January, but overall, our mid- to long term prospects, growth prospects for the business have not changed. We're So very excited about the prospects.

Operator

Our next question comes from Martin Yang with Oppenheimer. Please proceed with your question.

Speaker 3

Hi, thank you for taking my question.

Speaker 11

My first question is on your investments Into the development resources in the future, can you maybe talk about your plan for mobile or for Zynga particularly versus the rest of a more PC and console facing part of the Take 2, in terms of headcount increase or any other support infrastructure you have in plan after integration.

Speaker 2

I think the good news is that we have a very robust team now. We have 11,000 colleagues around the world and we have the ability to pursue a very ambitious Program of Development and Publishing. And at the same time, we're a growth business and we expect to continue to grow. So We don't have expectations that we will significantly increase our headcount anytime soon. At the same time, Assuming we grow in the way that we expect to and we have an expectation to grow very significantly in the next 3 years, I assume we will increase our development headcount somewhat.

Speaker 11

Thank you. One more question, if I may. Can you maybe give us more details on the pipeline shift Intake 2, is there more conventional reasons like the game is not ready or is there Any macro factors play into that decision in terms of you feel that market isn't ready for the game, you want to wait until Broader consumer spending environment becomes more friendly to the games release.

Speaker 3

Yes. I mean, it really is simply that the games To the extent that we're moving games to shifting later, which is when we have pipeline shifts, that's typically the case. We typically don't move games up. But that is really based on where the game is in development. We would not hold a game that's ready to release Based on any overall economic trend or something going on in the market, potentially we would maybe move a week or 2 depending on for marketing windows, but generally speaking when the game is ready, that's when we release it.

Operator

Our next question comes from Brian Fitzgerald with Wells Fargo. Please proceed with your question.

Speaker 12

A couple of quick ones, maybe riffing on that macro theme. For a long time, we've accepted the narrative that gaming spend is really resilient in a recession because of the low cost per hour of entertainment, but at Same time, the model has shifted towards digital and RCS. Strauss, you hit upon mobile consumer discretionary, mobile advertising. How resilient do you think overall RCS consumer PC would be if we came into more of a macro environment? Seems Be a little more resilient than free to play type of models on the mobile side.

Speaker 12

And then quick follow-up, kind of an odd question. Does your PGA Tour business, is it seeing any impact from the lift tour and the noise around that? Thanks.

Speaker 2

So on your first point, I've been asked about the potential impact of a recession on our business Since I started with these conference calls, some 15 years ago and over and over again, I've said, I don't believe the entertainment business is Recession proved or even necessarily recession resistant. And I think we're seeing now that a decline in consumer spending An increase in inflation will have an impact on the industry. You've seen it from our report today and from our competitors' reports as well. I think conceptually, the impact is probably greater on free to play for the reasons that I said earlier in the call You can play those titles without spending money and you may just decide to spend less frequently or less in aggregate. With regard to a console experience, you have to buy the game to play.

Speaker 2

And so I think if you want the title, you're going to buy it. And as you point out, It's a very good value for consumers. And on your second point, no, we haven't seen any impact on our ongoing sales or engagement with PGA Yes, Tore, based on, as you put up the noise around this new offering.

Operator

Our next question comes from Matti Lejune with Bernstein. Please proceed with your question.

Speaker 7

Hello, good evening. A question on IDFA. Now you pointed out your outperformance on mobile. Now just wondering if the Chartboost stack that Zynga has would have helped you perhaps navigate some of the headwinds that some of your mobile peers Have pointed out regards to IDFA. So could that user acquisition advantage maybe help there With the outperformance.

Speaker 7

And then just to check on that macro pressure on the business, Are there any interesting geographic trends in terms of differences, for example, between the U. S. Market and elsewhere as you look at Those macro headwinds you're seeing so far this year? Thank you.

Speaker 2

Look, the change in IDFA is the new reality, and we've been operating within that new reality for some time. I do think that our massive consumer database gives us the benefit in that we have all kinds of in house Proprietary information that will help us with our marketing. I do think that the ad tech platform that Zynga has and is building further, Including Chartboost will help us, as I said earlier, do even better. I don't I'm really not concerned about this post IDFA World. And in terms of the macro trends, now the world tends to kind of move in lockstep on an economic basis.

Speaker 2

So we don't see any We don't see any particular geographic changes that meaningfully influence our company.

Operator

Our next question comes from Eric Sheridan with Goldman Sachs. Please proceed with your question.

Speaker 13

Thanks for allowing me to ask a question. Maybe I'll ask a big picture one. Strauss, we're coming up on the beginning of the 3rd year of this Console cycle at the end of this year. Any thoughts about what you've seen from new console adoption and what it's meant for overall gaming habits Among new users and how do you think longer term about aligning some of your more interesting content until we get much deeper into the penetration curve because this console cycle Has been very different because of elements around the supply chain dynamic. Thanks so much.

Speaker 2

I think you nailed it. It's hard to Call what's going on because it wouldn't normally be early 3 years in, but it has been because of the incredible supply constraints. What we have seen though is that when people are buying new consoles, they're highly engaged. So the users, for example, of GTA V, Who are on NewGen are much more engaged than prior gen users. Now that may simply be because they have new machines and They're excited about them.

Speaker 2

But it may also be and it wouldn't surprise me if this were the case that because the new consoles offer a better experience. It's a more engaging experience. And that historically has been the case that our business has grown coincident with The growth and exploitation of increasingly robust technology, and I would expect that to continue for some time to come.

Operator

Our next question is from Mike Hickey with The Benchmark Company. Please proceed with your question.

Speaker 14

Strauss, Karl Lainie. Congrats on the quarter guys and congrats on your acquisition, pretty exciting. Two questions for me. First one on your new mobile games from existing IP. Are we are you sort of thinking casual spin offs here like a Red Dead Poker Or GTA Casino, are you thinking more core mobile game releases off your IP?

Speaker 14

If it is core, do you feel like you have the resources now that you've added to make kind of core mobile games? Or would you need to be In a position to hire or create new teams or partner. That's sort of the first question. And the second question, On Gen Z and Gen Alpha, besides being very useful, when you think about your biggest IP and where you've had The most last year over the decades. Curious what you think your biggest opportunities And challenges are for sort of this emerging new generation of gamers.

Speaker 14

Thanks guys.

Speaker 2

So, thanks Mike for your comments and your question. With regard to the creation of new mobile titles based on legacy Take 2 IP, it remains to be seen what Those expressions will look like it will be driven by the passion and the talent of the teams. And to your question regarding whether Zynga Has the ability to do that development in house? I think the answer is unquestionably they do. Zynga has any number of talented studios all around the world that distinguishes Zynga from Virtually all other mobile developers and publishers, and it's one of the things that we found most exciting about the company, now the label.

Speaker 2

In terms of the next generation of gamers, I mean, the evidence is that they play more. They're more engaged and they play more. And that makes sense because What was new technology 15 years ago, to them is just part of the landscape. They've grown up and it's like fish in water. People kids start playing with smartphones as early as they can play with blocks.

Speaker 2

So I have to believe that Interactive Entertainment will continue to grow disproportionately to the rest of the audiovisual entertainment businesses. There's ongoing evidence that it is and will remain the fastest growing segment within the entertainment industry. And I think this next generation will just put A finer and finer point on that. In terms of what we have to give them to engage them, if that is still the same, which is The highest quality entertainment experience that is available on the face of the earth and that's our job, that's our mission and that's what drives us all every day.

Operator

Our next question is from Drew Crum with Stifel. Please proceed with your question.

Speaker 15

Okay, thanks. Hey guys, good afternoon. Maybe for Strauss or Carl. Guys, are you seeing any changes with the development cycle? And specifically, has COVID in any way elongated the time it takes to And is that something that could put the development pipeline at risk?

Speaker 15

And then separately, guys, what is the company's plan around debt reduction for fiscal 23. Thanks.

Speaker 3

So in terms of development cycles, I think development cycles are ever changing. And obviously, it varies game by game. The games are getting bigger. They're getting more complicated. There's new technology out there that we can avail ourselves to.

Speaker 3

So and all of that's a learning process. And that learning curve is often very steep. And but I would say there's nothing specific about the changing development cycles that we haven't seen before. It's The games are bigger and they're more complicated and there's more to do. I mean, that's actually what makes our business so exciting.

Speaker 4

In terms of debt reduction, we

Speaker 14

Have a

Speaker 4

strong cash flow. The business will be generating a lot of cash this year. So we look at paying down as much debt It makes sense too at the end of the year, but at the same time, we look at acquisition opportunities as well. So if there's something that makes sense for us to buy during the year, We would also love to do that. So, let's just see what it looks like at the end of the year based on what the needs are during the rest of the

Operator

Our next question is from David Karnovsky with JPMorgan. Please proceed with your question.

Speaker 5

Hi, thank you. Just following up on mobile advertising at Zynga, I think you mentioned you were up year over year. Given the overall mobile environment is seeing macro pressure, just wondering how you kind of reconcile that with the advertising games? Is that about market share? And then wanted to see if you could just speak to the decision to delay the full launch A Star Wars Hunter is beyond its initial timeline.

Speaker 5

And is that game still slated for a cross platform just because the platform is listed as TBA in the release? Thanks.

Speaker 3

So in terms of the advertising business, yes, the overall advertising market, generally speaking, has experienced Year over year declines, due to ad tech consolidation and the lower spend on digital advertising. Our advertising revenues have The growth has decelerated from the last quarter, but they grew notably versus last year. And we believe we outperformed the industry trend. We expect the trend this trend to improve Over the course of the year, with natural seasonality and optimizations we're making in our network mix and pricing. So what was the second question?

Speaker 3

Yes, in terms of Star Wars: Hunter It really is just a matter of making sure that the game is delivered at the highest possible quality, And we have not changed anything around platforms.

Operator

Our next question is from Andrew Maroc with Raymond James, please proceed with your question.

Speaker 3

Hi, thanks for taking my question. 2 for me, please. Given the criminal enterprises in the last 2 GTA Online expansions How should we be thinking about the GTA online content pipeline or philosophy as development on the next premium GTA ramps And resources are reallocated. And then second, could softness in the ad market create opportunities for lower cost marketing or change marketing

Speaker 2

Thank Rockstar Games has been supplying ongoing content updates for Grand Theft Auto Online since its release in 2013. The most recent one was well received and they continue to put out terrific content. Any announcements about upcoming Properties do come from the labels. We don't tend to talk about them here. And, the great question about advertising costs, and I think it's a fair one, If you're seeing softness in the market, does that mean you can market your titles more cheaply going forward?

Speaker 2

And the answer is, we might see some minor Adjustment in the cost profile, but at the end of the day, we spend a lot to support our console, big console launches. And I don't think that softness in the ad market would probably have a material impact on that.

Operator

Our next question is from Clay Griffin with MoffettNathanson. Please proceed with your question.

Speaker 3

Hi, good evening.

Speaker 15

The higher ASP on the championship edition of 2 ks. I'm just wondering if you're seeing any material change in mix as we head into this kind of preorder window. I guess, In light of some of the softness in free and play mobile, I guess the question begs, do you have any flexibility to maybe go a bit more aggressively with bundled virtual currency In the preorder window?

Speaker 3

Yes. I think I don't know if there's anything specifically in the market that would change our philosophy on how we package our product. I think we always are trying new models and new pricing to try to optimize the situation. But I don't really see a market Specific opportunity arising, but you'll see us experimenting all the time.

Speaker 15

And no real change in mix versus last year Normalizing for this championship edition?

Speaker 3

There'll be some mix changes in mix, but We haven't really talked about it at this point.

Speaker 14

Okay, thanks.

Operator

We have reached the end of the question and answer session. I'd like to turn the call back Over to Strauss Zelnick for closing comments.

Speaker 2

We just like to thank you all for joining us. We're really proud of how the company is performing. Our combination with Zynga is off to a terrific start culturally, financially, strategically and creatively. And I want to reiterate my appreciation to our colleagues all around the world. We'll be talking to all of them tomorrow in our various town hall meetings.

Speaker 2

These results are thanks to their hard, dedicated and creative work. Thank you all.

Operator

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.

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Earnings Conference Call
Take-Two Interactive Software Q1 2023
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