Take-Two Interactive Software, Inc. (TTWO) Earnings Call Transcript & Summary

Okay. So next year, Take-Two is going to be releasing its NFL non-simulation game. Could you just talk to us a little bit about the opportunities in football?

Well, I mean, look, we're very excited to be back in business with the NFL and the NFL PA. We're -- I'm particularly excited about what that title will look like. As you said, it's non semi title, more to come from 2K. And we -- I almost never make projections about how we're title to do even if I'm really confident, and it's been an awfully long time since we brought out a football title, and this is a non-semi title. So I wouldn't want to make any optimistic claims even though I feel very optimistic. I would note that we put out PGA Tour 2K recently. And we've been in the Golf business before, and we're really excited about how that's going. So I do think 2K sports titles are doing really well. And these times seem to have enhanced folks' interest in video games in the sport genre.

Okay. And switching gears to mobile. So Take-Two recently acquired Playdots, free-to-play casual mobile game developer, most all known for Dots Two, which has over 80 million lifetime downloads. Could you talk about how Playdots fits into your broader mobile strategy alongside social point? And what drove you to doing the acquisition?

Well, we've made no secret of the fact that we would like to continue to grow our exposure to casual free-to-play mobile titles. We started with organic titles from 2K, WWE, SuperCard has been downloaded over 21 million times, the NBA 2K companion app has done great. The acquisition of Social Point has been terrific, brought us Dragon City and Monster Legends and more recently, Word Life, which is doing really well and has -- shows great promise. Social Point working on an array of titles as well. And the acquisition of Playdots was an accretive acquisition to build up our focus in that market. And the Playdots organization is working on new titles as well. Garden Days is coming. It's a beta. It looks really promising. So they fit together in terms of representing collectively our mobile strategy going forward, which is to make owned titles that are phenomenally successful. And continue to build those while constantly bringing new intellectual property to market.

Do you want to leave some time for questions? So if anybody has a question, feel free to submit the question through the ask-a-question box in the webcast, and I'll go ahead and ask that on your behalf. But before I do open it up, and I see a few questions coming in, Strauss, could you just comment around industry M&A, without commenting on any specific deals, what are your views on industry M&A and whether you see anything in the next several years that might spur consolidation?

Well, many years ago, I predicted consolidation that didn't occur. So I don't want to make that mistake again. I think the business naturally has drilled down to, I don't know, fewer than 10 participants who really matter. And at this stage of any entertainment business's development, that's about right. Over time, it probably will become more concentrated, and I would expect combinations, big combinations tend to be driven by a move where either the business has matured or perhaps is even declining. That's not the case here and won't be the case here for a long time. And/or where catalog is such a significant part of the company's revenues that an acquirer, merger partner can say, look, I don't -- maybe I don't even need what they're doing from a frontline point of view, which is risky and expensive. Maybe I'll just buy this for the catalog, kind of all the costs, and I can create an accretive opportunity in the price point through doing that. And that's unlikely to be the case now either because catalog is still too low a percentage of the industry's revenue, although higher for us than for many, because we have a very strong catalog that outperforms others. And so I don't really see it happening anytime soon. I think where you'll see it happen is, if 1 or more companies stumble, if multiples come down, if sector growth declines or perhaps even flattens, but those are not my expectations. In terms of other M&A, look, we just did a deal. Our competitors acquired companies all the time. Zynga has been on an acquisition streak. For a couple of years, has deployed a couple of billion dollars on acquisitions. And I don't believe they said they intend to stop anytime soon. We have $2.285 billion in cash and no debt as of our last quarter. We're generating about $500 million of unrestricted operating free cash flow this year. So we have, we have the ability to do interesting things as well. Our rubric is we want something to fit strategically. We want to buy intellectual property, and we want the deal to be accretive.

Great. So we have a few questions coming in, a couple at the industry level, which I'll start out with. One is on the console cycle. So given what we know about Xbox Series X and S, and the PlayStation 5 so far. Can you talk about how you expect that to affect demand for video game software and whether or not this console cycle might behave differently than prior ones. And will these consoles be as in -- as -- will these consoles have the same level of demand as prior consoles?

Well, look, the whole business has shifted from what it looked like years ago where there really was a sign curve, you launch new consoles, software purchases, boom, they flatten into a bell curve; the platform matures, purchases begin to decline. New consoles are announced, purchases plummet and then starts over again. And at the trough, typically, 1 or more companies went bankrupt because they didn't plan accordingly. And their overhead was still structured for the boom, and suddenly, they were in the bust. That hasn't been the case for really 2 transitions. And we're now growing up entertainment business and consumption stays stable or grows year in, year out without regard to new technologies being released. Also, a good deal of the business is now driven by PC format. So we can have a frontline what is thought of as a console title and 40% or 50% of the net bookings can come from PC formats, which is all downloaded. So I don't -- I think what these new consoles will allow us to, which will, of course, be reflected in PC as well is super exciting creatively. Cooler stuff, better looking stuff, better memory, faster load times and the like. And I think that will be material. I think it's a material upgrade in the toolkit, and I'm really excited about that. And that, I think, will encourage more people to come into the business and will accelerate growth of what was already a rapidly growing business. But I don't see that it will come along with all the detriments of that prior sign curve wave that doesn't seem to exist anymore.

And there's a question that came in about IDFA. Could you talk about how you got comfortable with the changes that are occurring for IDFA when you were doing the due diligence for the Playdots acquisition? And do you expect those changes to impact Playdots or Social Point in the future when those changes are implemented presumably in early 2021?

We have to make sure that they don't hurt us. And initially, it's going to put a lot of pressure on our ability to target market. And it will put pressure on everyone else's ability also because we have hundreds of millions of customers. We have an awful lot of data. We share the data group wide, and that should allow us to create our own algorithms and therefore, target relatively well, relatively effectively, but I don't doubt that the cost per install for mobile is going to go up at least for a while. At the end of the day, we have the ability to handle that increase in cost and decrease in clarity. I think some smaller competitors may have a very hard time. The more powerful you are economically, the greater your hits, the less relevant it is, the less powerful you are economically. And the smaller titles, the more difficult it will be. But anything that makes it harder to compete benefits legacy players. And that's happening to us in console, and I think will happen to us in mobile as well.

When you think about industry gaming growth over the next several years, what are going to be the key drivers for industry growth? Will we be able to drive increased monetization across a larger number of players in western markets at? Is international the next big opportunity is the e-sports? Any color on that would be really helpful.

Well, we're excited about e-sports. Our NBA 2K League joint venture with the NBA is doing really well. We just had our third season, and we were excited about the continued growth and engagement and viewership. But it's still a very small economic opportunity. I think growth will come from geographic expansion. So right now, we and the industry really don't address Russia, the Middle East, most of Asia, India and Africa, and these are really huge potential opportunities. Specifically in Asia, China is already a meaningful market for us, but could be a whole lot bigger, especially if restrictions are relaxed at some point. And I feel relatively confident that at some point, the government will feel comfortable saying, look, we really tested this enough to realize that western entertainment is not going to be burdensome, is not going to be troublesome. And it would be great for our broad consumer base to be able to avail themselves of that entertainment. I believe that, that can happen in time. And in the meantime, we're happily in business in China. Naturally, we pursue the appropriate regulatory approvals in order to launch titles within China. So I think geographic expansion is an enormous area of growth. Then the growth through different types of distribution, for example, cloud gaming distribution. I'm not a believer that, that will be utterly transformative. I am a believer, it can make a real difference. If you can bring people into the market with very little friction, they don't have to buy a console and they can just basically sign up, press a button and next thing, playing one of our games, then that should increase the size of our business, and they'll be able to bring our games to far-flung places. But of course, remember, you're still subject to the local infrastructure. We can't get around that. We're not dropping it in by parachute or satellite, at least not in most instances. So finally, the biggest area of growth naturally will be through new hits and new expressions of what interactive entertainment is. And that, to me, is the most exciting, is that's where we can make the biggest difference. And that's what our teams are working on. The intersection are trying to be the most creative and try to be the most innovative. And in the same way that there was no mobile business to speak of 10 years ago. 10 years from now, I have to believe there'll be new formats and new approaches to interactive entertainment that don't exist today. And we owe it to ourselves to make sure that we're at the frontline -- on the front line.

Yes. How do you see the debate around take rates for mobile platforms and for that matter, console platforms playing out?

I made no secret of the fact that I believe that distribution costs have to decline. This 1 point of time, this business was an oligopoly from a distribution point of view. And naturally, that creates market power on the part of the gatekeepers. And as new entrants have come in and the business is further diversified through other areas of content and other channels of distribution, that market power declines. And we've said we expect that distribution costs will meaningfully decline. We ask people not to underwrite to things like that, but we have said we expect it to happen. And for example, the Epic Store has a much lower distribution costs than competing stores. And that's a matter of public record. So without regard to what's currently going on between Apple and Epic, I expected this to happen -- I wouldn't have expected that litigation to occur, pardon me, but I think that could accelerate changes.

Yes. I guess while we're on the topic of Epic, Unity and Unreal have been getting a lot of attention, and they've been growing really rapidly. And I think there is a view that these tools are helping to democratize game development. Do you see that to be the case? Are you seeing more independent competition because of that democratization of game development? Yes, I'd love to get your opinion on that.

I don't see that at all. I mean tools always get cheaper over the course of entertainment business is growing. Creativity always gets more expensive. So the good news is that you're below the line, costs are going to come down. The other news is you're above the line, costs are going to go up as the business becomes more successful and becomes larger than creative talent properly is rewarded. And we believe we have the best collection of creative talent in the business, and they're highly valued by this company. And that has served us extraordinarily well. So I actually think the contrary happens as you see the cost of tools decline, what does that mean? That means you could -- in the same way that 35 years ago, a high school student couldn't make a movie basically. They had like an 8-millimeter camera and kind of cut something together, but to do it with synchronized sound and make it look even half decently, very difficult. And today, any high school student knows how to make a movie, any junior high school student knows how to make a movie. They can make a TikTok video, they make an Instagram video, they can make a movie. They make movies for their classes and for their friends. But you're not going with theater. We're going on Netflix and watching any of them. So the same thing will happen in the video game business, people will be able to make small prototypes and make interactive entertainment. But in the same way that being able to make a TikTok video does not mean you just became Jim Cameron and can make a $250 million Epic motion picture, you're not going to make a little video game presentation that you could do at home with a friend or 2 and somehow compete with one of the titles of hundreds of our colleagues devote many years and many millions of dollars through. It's just the 2 different businesses.

Right. It doesn't seem like an imminent threat. And we're about bumping up on time. So let me ask a closing question. Strauss, if Take-Two is successful over the next 3 or 5 or 7 years, whatever you think the appropriate time frame is. How does the company look differently relative to today? And what does that execution look like year in, year out?

Well, again, I wouldn't recommend anyone underwrite to this because we give out our guidance annually, but we do expect to have a more robust frontline release schedule. We do expect to bring out new intellectual property every year. And our story has been one of organic growth. When our group took over the company 13-ish years ago, it had $700 million in net revenue and a $700 million market cap. And today, we're knocking on the door this year of $3 billion in net bookings, and we have an $18 billion market cap or so today. And that has largely, if not entirely been built organically. The only meaningful acquisition we did during that time was Social Point. And then most recently, Playdots, which was not reflected in these numbers. So our story has been one of organic growth. I expect that to continue, and we have very high expectations. We have a lot of things we need to get done. We have 93 titles in development in the next 5 years. And while we have highly competitive gross margins, we still don't have competitive enough operating margins because we're still subscale versus our bigger competitors, of which there are only three. So we have a lot of work to do. But that work is done by making the best entertainment in the business and then distributing it and marketing it more effectively than anyone else. And then running the business that sits underneath that efficiently and rationally and in a decent and kind way. That's what we try to do every day. And so far, it served us well. We're going to probably try to keep doing that.

Excellent. That's fantastic. Strauss, thank you so much for your time. And more importantly, your insights. That was incredibly helpful.

Thank you.