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

Good morning, good afternoon, good evening, wherever you are zoomed in from. We hope -- the first couple of days of the Morgan Stanley 2021 TMT conference were productive. Here we are in day 3. We are thrilled to have Strauss Zelnick from Take-Two with us for our fireside chat. So Strauss, thank you so much for joining us.

Thanks for having me. Nice to be here.

Hopefully, we'll be back live for next year, but we'll try to do our best virtually.

Sounds good.

Before I get started, a couple of things. One, for anyone who is watching on the webcast, there is an area where you can type in questions. If there are any specific questions we don't cover. Please be sure to put them in the queue, and I can make sure that we cover the topics that are most expense -- they are most important to you all. The disclosures, for important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. If you're a member of the press, we would ask you, please disconnect. Strauss, you've been at Take-Two for quite a while. You have years and years of experience in the media industry. It's always great just to get the state of -- the state of how you're thinking about media in general, and video games specifically, and then most importantly, everything is going on at Take-Two. So we always really appreciate you being here. Thank you.

Thank you.

The stock market around video gaming can be volatile, stating the obvious. Even if we sort of think back of where -- what the sentiment on video gaming was a year, 18 months ago versus now, it really seems like the shelter in dynamics and all of the innovation that you rolled out throughout 2020 have almost made the market realize the opportunity could be bigger than appreciated even 1 year ago right now, and we were sitting down in San Francisco. So I guess, I'd be curious for your perspective of, one, what has changed in your mind about the long-term opportunity now versus a year ago? And what have been some of the innovations that you've rolled out that have really sort of made the new players come in and the players stick, et cetera?

Well, in a way, and really nothing has changed. The industry was in great shape a year ago, and it's an even better shape today. It's a $160 billion market. It's the fastest-growing part of the audiovisual entertainment business. And there's every reason to believe that will continue because the average age of one of our players now is 37. But as you continue to age, you don't give up interactive entertainment. To the contrary, you continue to consume the entertainment you fill them up with at the age of 17 for the rest of your life. So as every year passes the cohort continues to grow and you have to assume that cohort will continue to grow until the average age is 55 or 60 or something like that, given the aging of the population. So the wind continues to be at the back of the industry. Now that doesn't mean we'll do well we have to execute to do well. But thankfully, our execution has been very strong. There's no doubt that sheltering-at-home was good for our business. It's odd to say those words since obviously, the pandemic has been tragic for so many. However, our industry has benefited. And there's a commonly held view that sheltering-at-home caused people to either be introduced or reintroduced interactive entertainment. And to realize that what we offer as an industry is extraordinary, great graphics, great stories, great gameplay. And moreover, the ability to engage with friends or communities all around the world while you're having the entertainment experience in. We -- human beings like to consume entertainment in groups. We do that with every form of entertainment. There is -- even if the experience is technically a solitary experience, we like to consume with other people. So interactive entertainment offers the best opportunity to share the experience with other people because you can actually engage with cooperative missions or you can compete with each other, and you can talk to each other over headsets why you're doing it. It doesn't matter whether you're in San Francisco and I am in New York or London or Singapore, you name it.

Yes. No, it's a great point because I think that the metaverse term is almost overused at this point as far as you know.

Do you think?

Really, [ innumerable ]. And it's when you look at what you have built with GTA over the last few years. I almost think it's still underappreciated by Wall Street, the strength of that ecosystem. And so I guess, I would love to hear about the types of behaviors you see of those players playing GTA Online and how you sort of arguably, I would say, almost half a metaverse play in GTA you've built over the years?

Well, if Rockstar's Grand Theft Auto Online isn't a metaverse, I don't know what a metaverse is to begin with. And I think Rockstar has set the standard and actually created the opportunity for people really to engage in an open world without limitations. And so that engagement obviously includes playing the game, but it can also include creating new social spaces like hanging out at a club and listening to a DJ, who's playing highly credible recurrent music going through a resort, playing table games, having races or missions or roles. And most recently, we've actually opened up the possibility of a single player experience with the new Heists. So I think Grand Theft Auto Online continues to set the standard for what you can do in an open world environment. I was asked recently, are you aware that some people are having conference calls inside Red Dead Online? While they're playing the game or embodying characters. And the answer is, I really wasn't aware. That sounds fine. You certainly -- you can talk on the to client or in discord while you're playing. So it certainly doesn't come as a surprise. I don't know that, that was necessarily Rockstar's intention, but it was Rockstar's intention that should be able to inhabit these worlds and experience them as freely and as openly as you wish, and really have fun doing it and compete, cooperate or just be there.

Next year, we'll do this through Red Dead or that would be fun actually. Exactly. We'll do it the Casino Heist. The other game that, at least versus my estimates, I think you beat me 3 quarters in a row, maybe 4 quarters in a row is NBA 2K. The results just continue to be incredibly strong. I guess the 2-part question here is, as you look back at calendar '20, what areas of execution on NBA 2K are you most proud of that have really driven that performance and then as you look ahead for the franchise, what are sort of some of the still untapped opportunities you see?

Well, visual concepts continues to just make a better and better game. And of course, what was exciting about the end of calendar '20 was the launch of NBA 2K '21 for next-gen consoles because it was built from the ground up, and it's an amazing title and visual concepts in 2K also launched the open world for NBA 2K21, The City, which is a broader and more expansive version of with the part in the neighborhood were where you can gather as a community and share experiences that are not necessarily related to playing the actual game of basketball. So as a result, net bookings for the series grew 48% in the third quarter, and recurrent consumer spending grew 67%, vastly more than our expectations. We're seeing a lot of engagement average games played are now 14% higher than NBA 2K20 in the same period, and we expect that there's great growth going forward. We're already the biggest sports title in the U.S. However, we think we can have greater penetration. We've sold 8 million units to date. I think we can sell vastly more units. And we can also continue to expand along with the NBA's help our international audiences, and we expect that we'll be able to do that. So I think you're going to continue to see growth in the experience itself and the growth in international.

Got it. Last year, you talked about sort of the company's pipeline and how to think about all the work you're doing on new IP across a variety of genres and types. I know over the years, and we've sat down and talked, you talked about wanting to get to a point where you can have a more steady release cadence, 3 to 4 non-sports games a year, et cetera. Maybe just talk to us about where are you on sort of the pipeline numbers that you threw out throughout last year? And then how far away are you from sort of being able to have a more steady release cadence of non-sports?

Right. We announced that we have 93 titles coming to market in the next 5 years, about double our prior pipeline. And 2/3 are core gaming experiences and the rest are mobile releases, about 1/4 is free-to-play and 3/4 we expect people to pay for. And if we're able to achieve that and able to achieve it in a high quality way, which is crucial, then shouldn't be any problem to have 3 to 5 frontline releases a year, which is the goal. By the way, that's the goal we've reached previously. So we haven't reached it every year, but we've certainly reached that goal and now we have a vastly better opportunity to do so given the level of our ongoing development. Beyond that, the announcements will come from the labels in due course. So can't say exactly when we'll actually could get to this level, but I'm confident that we will.

Got it, okay. We'll stay tuned. On the stand-alone online modes for the franchise is sort of an interesting development. I wanted to talk to you a little bit about. You -- last year, you separated Red Dead Online so that it's accessible as a stand-alone. It sounds like you're planning on doing the same for GTA Online this year. I guess the question is sort of what have you -- what have you -- some of the learnings from doing that from Red Dead? And how do you see sort of the puts and takes of what that could do to the GTA, earnings power and the user base in the next few years?

I think it's a great opportunity, and it's essentially life cycle management. So we've now sold in over 36 million units of Red Dead Redemption 2. We've sold in over 140 million units of Grand Theft Auto V, obviously, coming to the next-generation platform in fiscal '22 in the second half of calendar '21. And as you sell that many units. And you -- at some point, will arrive at the conclusion that you saturated the market for purchasing the title. And at that point, you're willing to experiment with the possibility that maybe there's another way to bring people into the online experience. Make it super low friction, a lower price point, and sure, you don't have access to the original single player experience, but you do have access to an online world. And our view is perhaps that's a different market, and that's where you expand the player base. And I think we're finding in Red Dead Online with all the success that we've had with that. I think we've had, so far, the biggest year we've ever had apart from the launch year, that, that opportunity does exist. It's also certainly possible and we have evidence of the fact that people are willing to engage in this low-friction entry point to an online version and then double back around and buy the game. So what does it mean for Grand Theft Auto Online? I think it's an opportunity to bring in a larger player base. And depending on how those spending metrics line up, could be an opportunity for continued success. Obviously, we've already said that we expect to have another record year with Grand Theft Auto Online, which is amazing during fiscal '21. And and Rockstar is committed to delivering more content and broadening the experience and players are responding to that. So we've been saying, I think, forever, in 2013 that we expect the results to moderate, so far, that hasn't happened. I think we're all really excited about what the future can bring for Grand Theft Auto Online and Read Dead Online. And reducing friction and allowing people to try the experience out is 1 way to make sure that the player base continues to grow, assuming we give them great content.

Got it. Understood. Yes, it's good life cycle management. It makes a lot of sense, especially when the user bases are so big, and you're already doing such a great job. Just you open the funnel even more, hopefully. The console cycle, we would not be able to sit down for a year without -- without talking about the console cycle. Are we nervous, indifferent where are we now? So the new console cycle has arrived here we are. I guess I just wanted to -- a 2-part question. Number one, what the new console cycle, what types of new capabilities has it really brought to your studios to make the games even more appealing to users. Maybe talk to us a little bit about the technology side, the extent to which you can. And then you've made some adjustments to pricing around the new console IP. I'd be curious to see what you have learned from that to date? And what does it tell you about the potential long-term pricing power in the gaming industry?

Well, you got a couple of questions baked in there. In terms of what the consoles allow, the new technology means that we can do better graphics. We have quicker loading times, and we can create a more realistic, more fun, more engaging experience. So our developers are really excited about the new consoles and the new chips for non console devices. And the consoles, as you know, are selling as quickly as they can be produced. So we're very excited about this Console generation and what it means. We have discussed 3 titles so far for next-gen Consoles, NBA 2K21, which was actually built from the ground up for the new consoles. Borderlands 3, which has been fully optimized. Incidentally, that title sold in over 12 million units. And then we will be bringing Grand Theft Auto V to market for next-gen consoles, which will be remastering. Rockstar is going to remaster that title as they have in the past. So we're really excited about what the technology will bring, obviously, will be supportive. We have to be careful about timing because we want to hit the market when there's a big enough installed base for it to matter. But -- which is what we intend to do. In terms of pricing, we announced a $70 price point for NBA 2K21. Our view was offering an extraordinary array of experiences and lots of replayability. And the last time there was a frontline price increase in the U.S. was 2005, 2006. So we think consumers were ready for it. We haven't said anything about pricing other titles so far, and we tend to make announcements on a title-by-title basis. But I think our view is always deliver more value than what we charge, make sure the consumer has the experience and then has the experience of that they're paying for it and both are positive experiences. We all know anecdotally that even if you love a consumer experience, if you feel you're overcharged for it, it ruins the experience, you don't want to have it again, like go or great restaurant, a really, really fine restaurant, have a great meal and great service and then get a check that's double what you think it should be, you're never going back. And that's without regard to your price elasticity. So we always want to make sure that consumers feel like they -- that we delivered much more than we asked in return. And that's true for recurrent consumer spending as well. We're an entertainment company. We're here to captivate and engage consumers. And if we do that, then monetization follows, we don't lead with it.

Okay. One, what industry dynamic. Again, we feel like we talk about this quite a bit is consolidation and M&A and the structure of the industry. It's sort of interesting because we've been talking about it quite a while. And then recently, in the last, at least 6 to 9 months, we've seen some -- a lot of deals start to come through, Bethesda, Codemasters, Gearbox, Glu, Zynga announcement this morning. I guess, so from your perspective, what do you think has sort of brought on all these deals in such a short period from an industry perspective? And then philosophically, how are you sort of viewing M&A as a competitive weapon for Take-Two?

Well, I predict the consolidation in the industry many years ago, and I was wrong for a really long time. I guess it's proved that if you hanging around long enough, maybe you're inevitably right or even a broken clock is right twice a day. So I think you're seeing consolidation now because the business is beginning to reach that first phase of maturity. And that's what happens in entertainment businesses. In the early stages where there's massive growth to be had, and lots of people can find success, you'll see numerous players. Then it gets harder to make great products, harder to capture an audience. And those who are good at it grow and those were less good at it fail. That was sort of the second phase and it's true with every entertainment business. And then the third phase is the ones that do will, if they are more successful, begin to look at consolidation because having a higher share, if you can maintain your gross margins, will mean that you have higher operating margin. I have the highest operating margins, give the highest share. That's a tricky game in entertainment. It's not the GE rule. It be #1 or 2 in your space or don't play, it doesn't really apply to entertainment. Because you could actually be #1 in terms of revenue and lose money in the entertainment business, for example. It's hard to do that, the [ turbine ] business, but you can definitely do it in the entertainment business. So our goal is not to have scale for scale's sake, our goal is to grow scale because it allows our developers to do more of what they love because it brings great products to consumers. And because we are our investors' great performance, and that includes competitive operating margins. We have highly competitive gross margins, but our operating margins aren't as competitive as they would be if we were able to maintain our gross margins and have more scale. Now other people are doing this exact same calculus, well, how do you drive scale? First, for us, organic growth, our story has largely been an organic growth story, 14 years ago when my team came to Take-Two, we had $700 million in net revenue. We're now projecting net bookings this fiscal year of around $3.3 billion to $3.4 billion the bulk of that growth has been organic. We've done a couple of acquisitions that haven't generated all that much revenue. So we expect an organic growth story going forward. And certainly, our planned release schedule, 93 titles over the next 5 years. John Wright will support our view that that's -- that our future is bright. Equally, we've shown a willingness to acquire businesses that we think can be additive businesses with great intellectual property and great teams. And where the nature of the transaction is such that we can have an accretive transaction relatively quickly. And I think our competitors are looking at the world, unsurprisingly in a very similar way. The problem is that most corporate M&A fails, and I'll emphasize that interactive entertainment most interactive M&A fails. We have only done a handful of deals on my watch, but they've all been successful, very successful. We're successful is defined by accretive profitable. And sitting here today, those teams still exist, and they're making gains. So I think you'll see more of this as the big, try to get bigger, and you're going to see the business continue to drill down so that there are 5, 6, 7 major players in the business, which is where all entertainment businesses land before the sort of the fourth phase of consolidation which is the business is maturing, maybe it's not growing, maybe it's flat or declining. At that point, cost considerations cause you to have sort of the final consolidation of that's what's happened in music and in filmed entertainment.

Okay. Well, we'll stay tuned as the wave continues. Two of the deals you have done have been around mobile and with a Social Point and with Playdots, so mobile, we think it's the largest, fastest-growing aspect of gaming. A couple of questions here. And you talked about how 20 of your titles in the pipeline are mobile. So I guess my 2 questions are, when you think about different genres or different types of mobile games, what types of genres do you think your teams are best equipped to build and really execute on? And then secondly, if you could sort of look out 2 to 3 years and say, mobile was a success, how would you define mobile success 2 years from now for Take-Two?

You sort of broke up there at the second part of the question. In terms of our expertise, Social Point is known for mid-core titles and has 5 titles that are doing well. Dragon City, Monster Legends, Word Life, Tasty Town and World Chef and more to come. So they aren't making hyper-casual games. They have more gameplay depths. Having casual games and that they typically monetize and retain at better rates. So we're really excited about what's coming from Social Point. Playdots is also working on more titles coming up. Their primary side with Two Dots. In the mobile puzzles arm is doing just great, having great results. Their title has collectively been downloaded more than 100 million times. We're excited about what they'll bring as well. If we're able to continue to build our native mobile business. I think we have an opportunity to create a lot of growth in the mobile sector now represents less than 10% of our net bookings, right around 10% of our net bookings, we can do better than that. We hope to double our business in the coming years and going to give you a timetable, but that's the goal, if not do better than that. We also are in the business of bringing core gaming franchises to mobile devices in basically their original form. And then we also create mobile applications that tie to core releases. So that's really our 3-part strategy. But we're still under-indexed in mobile for the industry, and we intend to grow it. And the only way we can do that is organically by making more games and building the games we have and inorganically through selective, careful, disciplined acquisitions.

Is the -- one of the challenges is making any of these games, whether it's mobile, PC consoles having the right talent, to your point of organic growth. Is the competition for leading mobile engineers higher than it is for PC console. Is that sort of a constraint to growth that companies have to think through?

Well, there's no doubt that the constraint to growth for us is hiring great talent. I'm not sure that it's harder to hire talent expert in mobile development versus AAA console or PC development. I wouldn't necessarily say so, but hiring great talent is always a challenge, and it's our primary challenge. I think at any given time, we have hundreds of jobs open because we are in growth mode, as you've seen at our company. And it is challenging, but it's also challenging because we not only want the best and the brightest. We want a certain kind of person. We want someone who really is passionate and insistent upon pursuing is our fashion. And that's unusual in our business, when we really mean it.

Yes. That's helpful. Remasters is one of the other trends we've seen come. And with the planned release of remaster of GTA, it seems like that's a real opportunity. You have so much IP at the company, to your point of your years at the company and how you've grown organically. How do you think about philosophically remasters being a bigger part of the strategy going forward?

I'm not sure there'll be a bigger part of the strategy. Remastering has always been a part of the strategy. What we've done differently than the competition is we don't just port titles over. We actually take the time to do the very best job we can, making the title different for the new release or the new technology that we're launching it on. So we improve the technology, we upgrade visuals and we make performance enhancements. And that's why I think our remaster titles typically do so well. We've done great with the Mafia series, for example, and Grand Theft Auto is now heading into its third generation, which is incredible. And it was a standard bearer when it was launched. It was continued to be the standard bearer in the second generation, we'll see how Grand Theft Auto does in the next-generation obviously, I'm confident that Rockstar is going to deliver just a great experience. But you can't do that if you're just doing a simple port.

Right. Right. Last one, I actually had the same one in my e-mail and in the webcast. So it's clearly time of investors' minds. I know you've been asked for around GTA VI. So the question is, is there how do we think about remaster and console cycle potentially impacting the timing of GTA VI? And any interest in giving a year right here.

Right? So Rockstar hasn't announced any new titles for the market. And when there's an announcement to be made, it'll come from Rockstar. So I'll probably leave you there. And I don't think you would have expected anything different from me.

No. Great. All right. Strauss, thank you, as always, for the time. Thank you, everyone, for Zoomed in. There is a lot of dynamics going on in gaming, and we'll be anxiously waiting to see all the pipeline to come. Thanks, Strauss.

Thanks for having me.