Take-Two Interactive Software Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2024

There are 14 speakers on the call.

Operator

Good afternoon. Thank you for joining our conference call to discuss our results for the Q3 of fiscal year 2024 ended December 31, 2023. Today's call will be led by Strauss Zelnick, Take 2's Chairman and Chief Executive Officer Carl Sladeff, our President and Lainie Goldstein, our Chief Financial Officer. Before we begin, I'd like to remind everyone that statements made during this that are not historical facts are considered forward looking statements under federal securities laws. These forward looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us.

Operator

We have no obligation to update these forward looking statements. Actual results may vary significantly from these forward looking statements based on a variety of factors. These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10 ks and 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. 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.

Operator

Our press release also contains a reconciliation of any non GAAP financial measure the most comparable GAAP measure. In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at take2games.com. And now, I'll turn the call over to Strauss.

Speaker 1

Thanks, Nicole. Good afternoon and thank you for joining us today. I'm pleased to report that we achieved solid results, including net bookings of $1,300,000,000 our performance reflects our unwavering commitment to quality, the ongoing contributions from our outstanding portfolio, which is one of the strongest and most diverse in the entertainment industry and our immensely talented creative teams. During the period, Grand Theft Auto V, Grand Theft Auto Online, the Red Dead Redemption series and Zynga's in app purchases led by Toonblast exceeded our plans driven by engaging new content, partnerships and activations. This was partially offset by some softness in mobile advertising and sales for NBA 2 ks24.

Speaker 1

2 ks is implementing measures to enhance performance for the title such as offering new events and promotions and delivering an exciting and engaging content lineup. We expect lifetime net bookings for the title to be in line with NBA 2 ks23. Due to these factors, a planned release moving out of the Q4 and increased marketing for Zynga's new hit mobile title Match Factory, We're lowering our full year outlook. While the timing of Match Factory's user acquisition expense will reduce our profitability in the current fiscal year, We believe that this investment will allow us to grow our audience meaningfully and increase the lifetime value of the Match Factory franchise. We've always managed to take 2 for the long term and we have great confidence in our groundbreaking pipeline for fiscal 2025 and beyond, which we believe will enable us to grow our net bookings, increase our scale and enhance our profitability.

Speaker 1

At the same time, our teams are always looking for ways in which we can operate at the highest level of efficiency, which is one of our core tenants. We're currently working on a significant cost reduction program across our entire business to maximize our margins while still investing for growth. These measures are incremental too and even more robust than our prior cost reduction program and we aim to achieve greater operating leverage as we roll out our eagerly release schedule. Turning to the performance of our titles during the quarter. Momentum for Grand Theft Auto remains phenomenal.

Speaker 1

Sales of Grand Theft Auto V exceeded our expectations during the holiday season and to date the title is sold in more than 195,000,000 units worldwide. During the quarter, Rockstar Games released its holiday update for Grand Theft Auto Online, the Chop Chop, which captured the highest number of active users in several years, including the largest ever increase in new Grand Theft Auto Online accounts driven by the variety and depth of new vehicles and robberies, positive community sentiment and the game's inclusion in various subscription services. The Grand Theft Auto series is also benefiting meaningfully excitement surrounding Rockstar's announcement of Grand Theft Auto 6 and the release of its first trailer, which at 93,000,000 views in 24 hours broke YouTube's records for a non music video launch and along with partner channels became the biggest video debut ever. Rockstar's recent partnership with Netflix to launch the GTA Trilogy is also a resounding success quickly yielding the highest rate of installs and engagement on the subscription services game platform. In addition, Rockstar's membership program GTA Plus continues to grow rapidly powered by enhanced benefits for members including a rotating assortment of classic Rockstar titles.

Speaker 1

Red Dead Redemption 2 also surpassed our plans as our exciting holiday promotions and events resonated deeply with players. To date, the title is sold in more than 61,000,000 units worldwide. During the quarter, Rockstar Games supported Red Dead Online with free updates, including the new Call to Arms locations, A trio of new dead of night maps and a hardcore telegram mission alongside the return of the Halloween pass too. NBA 2 ks24 remains the number one basketball simulation experience in our industry and to date has sold in over 7,000,000 units. Unit sales for the Gen 9 version of the game are growing at a double digit percentage increase over last year due to an enhanced game play experience and wider console availability.

Speaker 1

As players migrate to Gen 9 platforms, we are seeing significant declines in demand for our Gen 8 offering. Players have been highly engaged with many of NBA 2 ks24's new features, including a season pass that helped average revenue per user grow 30% year over year. On October 6, 2 ks and Gearbox Software launched the Borderlands 3 Ultimate Edition For Nintendo Switch, we're pleased to expand further our beloved franchise by enabling players to make some mayhem at home or on the go with this thrilling high stakes adventure. Now turning to Zynga. We're very pleased with the team's ability to create successful new mobile games including Peaks Match Factory, which launched on iOS in November and Android in late December.

Speaker 1

The title is a top 30 grossing game on the Apple App Store in key target markets such as the UK and the U. S. And has shown stellar retention and monetization metrics on par with previous category leading peak titles such as Toon Blast. Based on these excellent metrics, we see strong long term potential for the title And we're planning to invest in new features and a robust marketing campaign to capitalize on its popularity with consumers and to scale it further. Zynga's other recent release Top Troops increased its engagement by more than 10% over last quarter propelled by the launch of new features and semi monthly battles.

Speaker 1

Looking ahead, the team is focusing on new brand collaborations, player competitions and social and community engagements. Overall Zynga's in app purchases exceeded our expectations with significant sequential improvement compared to last quarter. This was led by Tombblast which materially outperformed delivering its highest ever average revenue per daily average user and over 50% growth in its daily in app purchase revenue compared to last quarter. While we're encouraged by the trajectory of Zynga's in app purchases, Its ad revenues were below our expectations due to some changes that we're implementing in the hyper casual business, including a heightened focus on our profitability and the launch of new features that deliver blended monetization. Our direct to consumer business continues to grow and enjoyed a record holiday season.

Speaker 1

Our teams are working actively to add more titles each quarter to this highly accretive owned distribution channel. Looking ahead, Zynga has numerous titles in development and soft launch that we're eager to release worldwide in fiscal 2025 and beyond. It bears noting that launching hit mobile titles is both highly complex and challenging and we're gratified by Zynga's unique ability to release new properties to capture mind share and market share. In closing, although we're lowering our outlook for the year, we believe that our company's potential is vast and unique, driven by our creative talent, our owned and controlled intellectual property and our groundbreaking new pipeline for fiscal 2025 and beyond. As we execute on our strategic priorities, we believe that we'll deliver an array of unparalleled entertainment experiences that can captivate, engage and redefine our industry for audiences around the globe.

Speaker 1

I'll now turn the call over to Carl.

Speaker 2

Thanks, Strauss. I'd like to thank our teams for delivering another solid quarter and adding to the continued positive momentum of our business. I'll now turn to our upcoming launches for the balance of fiscal 2024 and beyond. This quarter Private Division and Eveningstar will launch A 3 d Platforming Game. Private Division will share more news about this exciting release shortly.

Speaker 2

On March 8, 2 ks and Visual Concepts will launch WWE 2 ks24. The title will feature several franchise advancements, including the 2 ks Showcase of the Immortals Celebrating 40 years of WrestleMania, 4 new match types, 2 new MyRise experiences and much more. We're thrilled to build upon our long standing partnership with WWE and to continue to set new creative benchmarks for this franchise. At The Game Awards in December, Private Division announced No Rest for the Wicked, an action role playing game from Moon Studios, Creators of the critically acclaimed Ori and Blind Forest and Ori: The Will of the Wisps. The title will launch early access on PC in the Q1 of fiscal 2025 the full release on PlayStation 5, Xbox Series X and S and PC thereafter.

Speaker 2

We will reveal more information about the game on March 1 during the label's Wicket Inside digital showcase. After 13 years, we're pleased that 2 ks will return to tennis and broaden its sports offerings with the upcoming release of topspin2k25. Developed by Hangar13, the was poised to provide an incredibly realistic and engaging tennis simulation featuring the world's top players and courts. 2 ks will share more details in the coming weeks, including an expected launch date. Zynga continues to deliver on their outstanding pipeline With our much anticipated titles, Star Wars: Hunters and Game of Thrones: Legends, each slated for global release in calendar 2024.

Speaker 2

We are encouraged by both games performances and soft launch and are confident that they will resonate with broad audiences when they debut worldwide. At the same time, Zynga's hyper casual studios plan to release a steady cadence of mobile titles for games that have the potential for enhanced retention rates and a mix of in app purchases and advertising to drive higher monetization and profitability. And as always, our labels will continue to provide new content and experiences that drive engagement and recurring consumer spending across many of our key offerings. Looking ahead, we remain highly optimistic about what we believe to be the strongest and most exciting development pipeline in our company's history. I'll now turn the call over to Lainie.

Speaker 3

Thanks, Carl, and good afternoon, everyone. We delivered solid holiday results, including net bookings of $1,340,000,000 which was within our guidance range. I'd like to thank our talented teams for their commitment to creativity, innovation, quality and value, which allows us to provide outstanding entertainment experiences for our players across the world. Grand Theft Auto V, Grand Theft Auto Online, the Red Dead Redemption series and Zynga's in app purchases led by SeamBlast exceeded our expectations. This was partially offset by softness in mobile advertising and NBA 2 ks.

Speaker 3

Recurring consumer spending declined 7% for the period and accounted for 75% of net bookings. This was slightly less than our outlook, driven by weakness in mobile advertising and NBA 2 ks, which was largely due to the effect of lower unit sales on its in game monetization. Recurring consumer spending for Grand Theft Auto Online, Virtual Currency and GTA Plus membership was up notably. During the quarter, we launched several mobile titles, including Top Troops, Match Factory and NBA 2 ks 24 Arcade Edition for Apple Arcade as well as Borderlands 3: Ultimate Edition for Switch. GAAP net revenue decreased 3 percent to $1,370,000,000 and cost of revenue declined 1% to $688,000,000 which included an impairment charge of $53,000,000 $177,000,000 of amortization of acquired intangibles.

Speaker 3

Operating expenses decreased by 10% to $808,000,000 On a management basis, operating expenses rose 4% year over year and was favorable to our guidance due to lower marketing and personnel expenses. Turning to our guidance, I'll begin with our full fiscal year expectations. As Strauss mentioned, we are lowering our outlook to reflect the softness we are currently experiencing in mobile advertising and NBA 2 ks24, A planned release moving out of the Q4 and increased marketing for Zynga's new hit mobile title Match Factory, which we believe will enable us to scale it more meaningfully to reach its full long term potential. Our revised net bookings forecast is $5,250,000,000 to $5,300,000,000 We expect the net bookings breakdown from our labels to be roughly 51% Zynga, 30% 2 ks and 19% Rockstar Games. And we forecast the geographic net booking split to be about 60% United States and 40% International.

Speaker 3

We are projecting recurrent consumer spending of 1% compared to fiscal 2023, which includes a full year of Zynga, partially offset by a slight decline in NBA 2 ks. Grand Theft Auto Online is expected to deliver modest growth for virtual currency and GTA Plus membership. RCS is expected to represent 79% of net bookings. We plan to generate approximately $100,000,000 in non GAAP adjusted unrestricted operating cash flow and to deploy approximately $150,000,000 for expenditures, primarily to support our office build outs and larger footprint. We now forecast GAAP net revenue to range from $5,270,000,000 to 5,320,000,000 Our total operating expenses are now planned to range from $3,550,000,000 to $3,560,000,000 as compared to $3,450,000,000 last year.

Speaker 3

On a management basis, we continue to expect operating expense growth of approximately 14% year over year due to a full year of Zynga, an increase in personnel marketing expenses higher depreciation, which are being partially offset by the realization of synergies from our combination with Zynga and savings from our prior cost reduction program announced last year. Now moving on to our guidance for the fiscal Q4. We project net bookings to range from $1,270,000,000 to $1,320,000,000 compared $1,400,000,000 in the Q4 last year. Our release slate for the quarter includes WWE 2 ks24 as well as Penny's big breakaway from private division. Largest contributors to net bookings are expected to be NBA 2 ks, Grand Theft Auto Online and Grand Theft Auto V, Toon Blast, our hyper casual mobile portfolio, Empires and Puzzles, WWE 2 ks24, Red Dead Redemption 2 and Red Dead Online, Words With Friends and Match Factory.

Speaker 3

We project our current consumer spending to decrease by approximately 5%, which assumes flat results for Zynga and a decline for NBA 2 ks. For Grand Theft Auto Online, First World Currency and GTA Plus membership are expected to be up. We project GAAP net to range from $1,320,000,000 to $1,370,000,000 Operating expenses are planned to range from $896,000,000 to $906,000,000 On a management basis, operating expenses are expected to grow by approximately 17% year over year, driven by the additional marketing the Max Factory that I mentioned previously, higher personnel costs and an increase in depreciation, which are being partially offset by the realization of synergies from our combination with Zynga and savings from our prior cost reduction program that we announced last year. Looking ahead, our teams remain committed to efficiency. We've begun a rigorous analysis to identify additional areas for cost optimization.

Speaker 3

The expected savings are incremental to our previously announced cost reduction program, We expect that it will be more expansive. We believe that these measures will enhance our margin profile and position our business for greater operating leverage in the future. In closing, while we are disappointed to have lowered our outlook for the year, we are exceedingly confident in our growth prospects. With our industry leading portfolio and passionate teams, we believe that we are poised to deliver the best content in our industry, reach new record levels of operating performance and deliver long term for our shareholders. Thank you for your continued support.

Speaker 3

I'll now turn the call back to Strauss.

Speaker 1

Thanks, Lainie and Carl. On behalf of our entire management team, I'd like to thank our colleagues for enabling us to achieve our goals and deliver another solid quarter. And to our shareholders, I want to express our appreciation

Speaker 4

Our first question is from Eric Handler with ROTH MKM. Please proceed.

Speaker 5

Yes, thank you and good afternoon. I wonder if you could maybe give a little Meat to the bone, so to speak, with your cost cutting program, how much cost or net savings have you generated so far? What do you think this next plan could do and over what time?

Speaker 3

Lainie will take that. Sure. So for the synergies with Zynga, we realized over $100,000,000 in savings And the original cost cutting program that we announced previously was over $50,000,000 So we do expect this plan to enhance our margins, both by reducing costs from our existing cost base and avoiding future costs. And they'll be incremental to these other cost cutting programs that we had and even more robust than the prior cost reduction program. And next quarter, we'll be in a position to give a little more details on the plan.

Speaker 5

Helpful. And then with regards to the advertising weakness that you're seeing, is that all related to what's going on with hyper casual business or does it extend also to in game advertising for casual games?

Speaker 1

This is Travis. So it's basically the hyper casual business and we're really optimizing the business for profitability. So there's always a balance. We're also seeing that we can actually have in app payments in our hyper casual business. So it's really moving to a hybrid model We're very excited about that.

Speaker 1

There's great opportunity in that business.

Speaker 6

Thank you.

Speaker 4

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

Speaker 7

Hi, thank you. I guess first, with some of the momentum and investment for Match Factory in the game delay, is there any update to your fiscal 2025 or 2020 6 forecast?

Speaker 1

Whitney is going to take that.

Speaker 3

We're currently in the middle of our budgeting process. At this time, the number is a little above $7,000,000,000 for net bookings for the year and given the typical shifts and tweaks that occur in our forecasting process. And this amount is still a huge growth over this year. And our pipeline is groundbreaking for next year and beyond, and our teams are making excellent progress on game development, And nothing material has changed with regard to the lifetime value of our portfolio. And we'll provide our initial outlook for fiscal year 2025 when we report our Q4 and full year fiscal year 'twenty four results in May.

Speaker 7

Okay. And then just on Match Factory, it looks to be the most substantial launch for Zynga the acquisition, I want to see if you could speak kind of more broadly to the process of launching new mobile games, whether this reflects any kind of Broader improvement in UA or content generation there? Thanks.

Speaker 1

I think so. I mean, I've said repeatedly in the past few years, the hardest thing that anyone in the industry can do is create a new mobile hit. It's super hard. And so much so that one of our big competitors just decided they weren't going to try it anymore. It just was off the table.

Speaker 1

We stuck with it and so did some of our competitors. So, clearly, the market's becoming more receptive the more reactive. There's a big title from one of our competitors, Monopoly Go, which is a huge hit. And we're gratified obviously here to see so much traction already in Top Troops and Match Factory. And Match Factory is already a top 30 title in the U.

Speaker 1

S. And U. K. Apple App Stores with lots of continued traction in the rest of the world, and it's really just beginning. We are supporting the title in the quarter And that's not money that we could possibly recoup in the quarter.

Speaker 1

So to put some color around the guidance change, That's really good news, not bad news. That's going to be a very profitable expenditure that will come back to us in the next fiscal year because of the way UA, we structure for relatively quick paybacks compared to the industry because we're conservative. So I do think, look, I think team at Xyng is doing a phenomenal job delivering great properties. It starts there. It always starts there.

Speaker 1

And Yes, I also believe the market is becoming more reactive. Remember, the market was down for the first time in its history in 2022, And it was flattish after that. And there were no new hits for years from us or anyone else. That's clearly changing. I think it puts further evidence on the table that Being exposed to mobile through the Zynga acquisition was a really, really good thing for this company and we're highly optimistic going forward.

Speaker 5

Thank you.

Speaker 4

Our next question is from Doug Creutz with TD Cowen. Please proceed.

Speaker 8

Yes. I wondered if you could be a little more specific relative to the guidance cut to the fiscal year. How much came from the title delay on the top line versus the other factors you cited? And to what extent the delay of the title out of the year might have impacted your operating income because presumably you will be marketing for it less?

Speaker 1

Lainie?

Speaker 3

So for the full year, when you look at the changes that we made to the 4th quarter forecast, the biggest drivers were 1st, the user acquisition spend and marketing for Match Factory, then the lower mobile advertising that we were seeing, updating expectations for NBA 2 ks24 and the shift of an unnamed title out of the year. So those are the top four primary reasons for the change.

Speaker 8

In that order?

Speaker 1

Yes.

Speaker 3

That was the order of magnitude.

Speaker 1

Okay.

Speaker 4

Our next question is from Andrew Marik with Raymond James. Please proceed.

Speaker 8

Great. Thanks for taking my question. Good commentary on the Netflix tie up with the GTA trilogy. I guess going back to maybe how that came about, what made you guys want to partner with that kind of fledgling mobile gaming platform and be one of the first major party titles out there?

Speaker 1

Look, we have to balance all The different elements that go into choosing how, where and when to distribute our titles. And as our titles enter the catalog, We can be flexible about how to distribute. We tend to support all emerging platforms as long as they serve and as long as the terms under which we support the platforms make sense to us.

Speaker 8

Great. And then maybe a little bit more of an esoteric question, but interested to maybe dig into that hyper casual commentary. Is there anything that's maybe changed in the last few months or quarters with player behavior in hyper casual games that they're now willing to do in app purchases?

Speaker 1

All about quality. I think, Rawlick has been really focused on making more and more robust titles. Remember, hyper casual came about As a business where you'd actually look at 100 of games a month and put them out into the market and see what would stick And then a game would stick for 3 months and then roll off. And what's happening now is Rolik has title. Rolik, we believe, is a leader in the space, has titles that are much more durable and long lasting and turning into games that could be games that will last for years.

Speaker 1

We hope that that will happen. And as those games are more durable and offer more playing value to consumers, there's an opportunity in certain of those games to have in app purchases. So we're really Moving from hyper casual to hybrid casual, but it's all about quality and meeting the consumer where they are. And the story of the entertainment business is always a move to quality. And remember, we're still in many ways in the nascent business.

Speaker 1

Interactive entertainment is roughly 30 years old. Mobile is roughly 12 years old. These are early stage businesses and they started off as glorified toy businesses and then they turned into Entertainment businesses and now they're year round entertainment businesses. All of that's great news for a company like ours. We are the number 2 pure play entertainment company on earth, and it's still early innings.

Speaker 1

And we're seeing a lot of movement In mobile, our 3 part strategy includes the word innovation. And innovation means that even if you start as Hyper casual, if consumers want you to go out marketing and give them something that's deeper and more compelling and more long lasting, you have to be there to do it. And I would say Our hyper casual team led by Barak Firdal in Istanbul is 1st class.

Speaker 6

Great. Appreciate the detail.

Speaker 4

Our next question is from Benjamin Soft with Deutsche Bank. Please proceed.

Speaker 9

Hey guys, thanks for taking the question. A follow-up on the GTA trilogy for mobile. Does this provide a blueprint for how to bring More of your titles to mobile in the future and just curious if you see an opportunity for additional partnerships with Netflix for additional mobile titles going forward as well? Thanks.

Speaker 1

We I'm not sure this is a model for mobile distribution because ultimately, it all on how you define mobile. We think of mobile as a game that you typically play on your phone, and we have a big portfolio of games like that. And we'd love to do more with Netflix. Who wouldn't, as long as the consumers are happy to be there and as long as the economics of those arrangements make good sense.

Speaker 4

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

Speaker 5

Okay, thanks. Hey guys, good afternoon. So on NBA 2 ks, I think it was enjoying some pretty strong engagement in RCS Yes, trends into the early part of fiscal 3Q at least. Any thoughts or explanation around what transpired thereafter? And just any more additional color you can give us in terms of your expectations for fiscal 4Q?

Speaker 2

Sorry, sorry, Strauss. Yes, NBA has the game has been incredible for NBA 2 ks24 and that continues to be the case. Still have very strong momentum around RCS, also driven specifically by our season pass. The Gen 9 SKU is performing Incredibly well. We've got double digit growth over 2 ks23 at this point.

Speaker 2

The real story here is that Gen 8 is actually underperforming our expectations. And I As people transition more towards Gen 9 and experience all that MBA the franchise has to offer, in the Gen 9 SKU, then you're going to see new growth in that franchise. So we feel really great about where the engagement is. Engagement in the title is fantastic. It really is, any sort of softness that we're is really a story about the Gen 8 product at this point.

Speaker 10

Okay, thanks.

Speaker 4

Our next question is from Martin Yang with Oppenheimer and Company. Please proceed.

Speaker 6

Thank you for taking my question. I have a 2 part question regarding GTA trailers reception. Do you see a meaningful uplift full game sales due to the trader performance on YouTube? And then Given that strong performance, do you think that could be future marketing events for GTA could be planned in conjunction with Potential updates for other games GTA, Red Dead, does that change your view on how to market GTA VI in the next 12 months?

Speaker 1

Look, we're really gratified that the announcement of the trailer was a huge event online. And then the trailer debut between YouTube and other marketing partners set a record for a video debut. So we couldn't be happier or more excited by the initial trailer. And I do think that excitement around GTA VI has had halo effect on the entire franchise. We've now in 195,000,000 units of GTA V and GTA Online continues to perform above our expectations.

Speaker 1

So I do think all things GTA lead to more excitement. As far as the marketing programs, I think Rockstar is particularly expert in marketing their titles and I think is considering all the appropriate angles.

Speaker 6

Got it. Thank you. And another question regarding marketing is we've seen Judas and Topspin With trailers and the revealers or teasers without a release date, Is your overall philosophy to market new games change or is it still largely based on studio level position on when they will release or announce the release dates for new games?

Speaker 1

Marketing is really driven by our labels in our studios and we don't have a fixed march to a release from particular marketing beats.

Speaker 6

Got it. Thank you.

Speaker 4

Our next question is from Timothy O'Shea with BMO Capital Markets. Please proceed.

Speaker 11

Yes. Hi. Thank you for taking my question. Back on Grand Theft Auto, we've spoken about the Grand Theft Auto trailer. My question is really, is there a way to quantify or maybe compare what you saw in terms of all this anticipation for GTA VI compared with how the level of anticipation that you saw for GTA V ahead of that game's announcement?

Speaker 11

And then I had a follow-up.

Speaker 1

It is possible to do research around that and our sense is that the anticipation is much higher, much, much higher. On the other hand, 195,000,000 units to date It's nothing to sneeze at. So we stopped well short of making predictions about how the title will do, but clearly anticipation is running very, very high.

Speaker 11

Yes, thank you. That's very helpful. And then just quickly, can we talk about How you make the decision about when to launch a game like Grand Theft Auto 6? Like who makes the call? What motivates them assuming this is game quality, game finish polish, maybe there's a desire to hit a specific launch window Or really anything else that might influence Rockstar's decision about the timing of when to launch this game?

Speaker 11

Thank

Speaker 1

We're seeking perfection. And when we feel we've optimized creatively, that's the time to release. So, and we're all in this together. In terms of motivations and incentives, the financial incentives of everyone who works at this company are aligned with those of the shareholders. So we essentially have, call it what you will, we have profit sharing plans throughout the company at the operating level and at the senior level, Our compensation is driven largely by TSR.

Speaker 1

So our goal is to align the interest of everyone who works here with the interest of the shareholders That keeps us all pointing in the same direction. So you're right, there is an inherent tension potentially between getting something to market and creating perfection, but this company errs on the side of perfection.

Speaker 11

Thanks, Strauss. Yes, anticipation is pretty high around here too. So we look forward to seeing the game.

Speaker 4

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

Speaker 10

Hey, Strauss, Karl, Lainie, Nicole, thanks for taking our questions. Lainie, just curious on your updated 25 view, I think this is 2 quarters, it's come down a bit, maybe now more than last quarter. And I think I heard you said that maybe 25% and 26% is sort of the same. So any color you can give us In terms of sort of bridging where you were for 'twenty five versus what you're thinking now? And if in fact you still thinking 25% 26% together is kind of where your original guidance was.

Speaker 10

And then on the Cost cutting, obviously, we're seeing a lot of that in the industry. I don't know if it's unprecedented in Strauss or not, but No doubt it's significant. And you've already gone through one round. Just sort of curious Your motivation here to take another sort of big cost reduction, especially given will it look like the next 2 years you're going to have pretty significant growth given your pipeline coming to fruition? Thanks guys.

Speaker 1

Lainie?

Speaker 3

Hi, Mike. So for fiscal year 2020 5, as I mentioned, it's really driven by changes in the release schedule. And obviously that will move some of the titles out into years going forward because the lifetime value of our portfolio hasn't changed. So we should we do expect to see growth in fiscal year 'twenty six over 'twenty five. So that hasn't changed.

Speaker 3

So it's just Our regular process of reforecasting and updating the business and at this time we're working on our budget. So that's where the numbers are falling out.

Speaker 1

And Mike, in terms of cost reduction, as I said and as you know, we have a 3 part strategy that supported us well through thick and thin and that is 1st and foremost to be the most creative company, also to be the most innovative and finally always to be the most efficient company in the entertainment business. And that's a big and we mean it and everyone here means it. And I think that it's time to take another look at efficiency and make sure that everyone is focused on the things that really matter and only the things that really matter and put ourselves in a position where we have the opportunity for great operating leverage as these titles come to market and as the revenues flow through the system.

Speaker 10

Thanks guys.

Speaker 4

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

Speaker 5

Thanks. Strauss, I just wanted your opinion on this recent Disney and Epic deal. Obviously, You have your own strong IP, but we're just curious how you think that might impact access to license IP, maybe for the industry at large if we continue to see this type of tie ups? Thanks.

Speaker 1

It's a good question. I only know what I read in And what you also read, what I read was that they're making an investment in a leading company, Epic, which is Obviously, it has a spectacular franchise in Fortnite. And then there was some talk around sort of creating a FortniteDisney ecosystem. And I don't know exactly what that means. But I'm not betting against my friends at Epic or Disney And I wish them well.

Speaker 1

So I guess it remains to be seen, but they're 2 fine companies. And I think any thing that's good for consumers and it creates excitement in our industry is good for Take 2, because it keeps people engaged with the properties that we bring to market. And we have the best collection of owned intellectual property in the business, bar none. And we're the number 2 player in the space. So, and we'd like to go from here.

Speaker 1

So I see it as a net positive for the business and we'll see how they do with it, but I'm certainly not betting against them.

Speaker 5

Thank you. Appreciate it.

Speaker 4

Our next question is from Omar DeSouki with Bank of America. Please proceed.

Speaker 12

Hi, thanks for taking the question. Back in May on your Q4 call, you gave a $1,000,000,000 operating cash flow guide. And since you've updated us on the fiscal 2025 top line outlook, I was wondering if you could also update us on the fiscal 25% operating cash flow outlook and any puts and takes around that? And then I have a quick follow-up.

Speaker 1

Great. That's Leini.

Speaker 3

So Omar, we haven't updated that number. We're still working on our budget right now. We would expect that number to change along with the release schedule changes And it will depend on when the titles are released during the year of when the AUOCF will be collected.

Speaker 12

Okay. So maybe riffing off of Brian's question about kind of Epic and Disney. Thinking about Grand Theft Auto online, do you see any potential for Grand Theft Auto to be a transmedia property, which maybe involves brands and IP from franchises outside of Take 2. Yes, that's the question.

Speaker 1

Yes. Look, we really do that our labels talk about what's going to go on in the title creatively. And I could riff endlessly and share my opinions. But I prefer to hear from Rockstar and they'll talk about what's coming in due time.

Speaker 12

Appreciate it. Thank you.

Speaker 4

Our next question is from Chris Scholl with UBS. Please proceed.

Speaker 8

Great. Thank you for taking the questions. Just going back to the Zynga deal, at the time you had talked about revenue synergies that would come through in time. Can just remind us where those initiatives stand today and how your thoughts might have evolved since you closed the deal? And then second question, just any early learnings you can give us on the iOS fee changes in Europe and how this might inform your mobile strategy going forward?

Speaker 8

Thanks.

Speaker 1

Yes, I mean, we've made great progress across the board, including on the revenue side. The biggest area of synergy so far has been Our direct to consumer initiative, which was a collective initiative to offer the consumer the ability to purchase in app currency for mobile games directly and that's been exceedingly successful, rolled out very quickly and quite profitable and there's a lot more upside to come. There are numerous other areas on which we're making progress, but kind of ticking the box with that one by itself. And in terms of Game store changes, there's a lot of moving parts here and some of the you mentioned in Europe, but some of the decisions in the U. S.

Speaker 1

Are contradictory. So there's a lot of dust left to shake out. But on balance, I remain of the view that I've stated years ago that distribution costs will come down meaningfully. They already are.

Speaker 6

Great. Thank you.

Speaker 4

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

Speaker 13

Great. Thanks. Good afternoon. Curious if you guys have a reaction to Speculation, I suppose, that Microsoft may be looking to take some of the titles that were formerly exclusive to the Xbox platform and making those More widely available, it seems at least part of that rationale, if it's true, maybe around just the cost to develop Big titles. And Strauss, love to get your thoughts on particular areas of development that are particularly sticky as it relates to costs?

Speaker 13

Thanks.

Speaker 1

Well, the big console titles are expensive and time consuming to create. And if you want to make the very, very best, It takes a long time and it costs a lot of money. I really don't want to speak for Microsoft and their strategy. There's been a lot of noise around that lately. I have no doubt that they'll express where they're heading.

Speaker 1

I would just say that if you take a look at their market cap now compared to a few years ago, don't want to bet against that management team.

Speaker 6

Great. Thanks.

Speaker 4

We have reached the end of our question and answer session. I will now turn the call back over to Strauss for closing remarks.

Speaker 1

First, as always, I want to thank our teams for delivering such great work with such extraordinary commitment. Everything that goes on here is a team effort and we are all aligned, all in this together and all working to do our level best To create the best entertainment for our consumers and to do it within the 4 walls of superb company with a great culture. I also want to thank our shareholders for their continued support. We're really excited about what is to come. Thanks for joining us today.

Speaker 4

Thank you. That will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

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Earnings Conference Call
Take-Two Interactive Software Q3 2024
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