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

You recently announced that you're acquiring Gearbox. You've obviously had a very strong historical relationship with the hit Borderlands and Tiny Tina franchises. Acquiring them -- and then I would imagine part of it was just safeguarding those franchises in the context of a company that was part of a larger company that's going through some pretty serious struggles. Can you talk about what other strategic opportunities or benefits that deal could bring?

Well, the biggest opportunity is to be in business with Randy Pitchford and his team, and I think we're bringing over 675 incredibly talented people. And of course, the IP, the Gearbox controls is not limited to the 2 titles you mentioned. They have a number of other successful IPs in their catalog, including Duke Nukem, the beloved Duke Nukem. So we think there's a wonderful opportunity. Gearbox is unique in that it brings AAA titles to market on a pretty regular cadence. They're not only really creative there sort of the definition of efficient. And we're thrilled to be closer to Randy and the team. You're right. We had long-term publishing rights before for Tiny Tina and for Borderlands, of course. But ownership and publishing rights are 2 different things. And yes, there's a safeguarding element, but there's also a margin element. And we're fortunate that there was a moment in time where we could strike a deal that would benefit all parties.

Borderlands was one of the first franchises that really did DLC in a way that resonate with consumers. Is there -- having a 15-year history of that? Is there sort of institutional mileage there that you think could benefit some of your other AAA franchises?

Unquestionably, I mean, we encourage our labels and within our labels, our studios to be highly independent and to pursue their own destiny. Equally though, in a best-case scenario, all of your colleagues benefit from sharing information and working together in a collegial form. So there's a natural tension and what I just said, there's also -- if you do it right, there's a benefit of what I just said. And Rockstar and 2K. For example, they're fiercely independent of each other, but we share information and we cooperate. So for example, when one label has success on a monetization scheme that information would be shared with another label. We have a corporate consumer database where we share all of our consumer data in a white room sort of sanitized way and certainly in a compliant way across our entire corporate footprint. So if we didn't do that, there'd be no reason for us to be this big company would make more sense for it to be totally scattered and independent. But I think -- and obviously, I'm biased, but I think we strike a very good balance between having independents creatively and codependents corporately when it makes sense. And that's what a big diversified entertainment company should do. One of the reasons that some of the big traditional entertainment companies have failed is because they never figured that out. They never ever found their way to cooperate where they should cooperate and not cooperate where they shouldn't. And so as someone has worked in all of those enterprises and led 1 or 2 of them. I'm really focused on trying to find the right balance. And the balance for us is like loads of autonomy where it comes to creativity and loads of cooperation when it's a cookie-cutter stuff that the corporation should be handling on people's behalf. And then thoughtful and responsible cooperation in areas that have fallen to the gray that aren't either black or white. And then we do with a common culture. And that culture is one of transparency, honesty and neutral respect. And when you put that all together, if you stay on top of it, you can drive a wonderful result of, again, pursuing our 3-part strategy, which is creativity comes first, we want to be the most creative company. Innovation supports that creativity. We want to be the most innovative company. By the way, I wouldn't say we are the most innovative company. I think we try really hard, but it's really hard to be innovative -- and by the way, expensive. And then trying to be the most efficient company and with our most recent round of cost cuts, painful as they are to implement, I think, once again, we can take the position that we're the most efficient company in the business.

So I think we're approaching the -- or we just passed the 2-year anniversary of closing the Zynga deal. As you sit here today, you had a strategic rationale for the decision. Do you feel like that strategic rationale is playing out the way that you had hoped it would, that you expected it would? And when you think about your multiyear pipeline, how much weight does the mobile side of your business carry in that pipeline's ability to drive growth?

So to turn out the way I thought -- definitely not. As the ink was drying on my signature, the mobile market fell out of bed for the first time in its 12-year history. And the market was down meaningfully in 2022 and down again modestly in '23 and now it's flat or growing again. However, it did work out in that the deal was immediately accretive and that was more accretive and that we were able to achieve and exceed all of our cost reduction goals. And in that, it worked culturally because we have a wonderful team in Zynga led by Frank Gibeau and great connectivity and great cultural fit. It worked in that we're right that the mobile market remains a robust market. And now thankfully, we're right that we've been able to create new hits, most notably in MatchFactory, thanks to the team at Peak. So it's really worked out well, but it was not without its terrifying moments. And I remain fully of the view that mobile will continue to be the fastest-growing part of the interactive entertainment business. And then for this company, not to be exposed to mobile means that we couldn't have pursued our destiny, which is kind of where we're at now, we're the #2 pure play in the space. And if -- if we are able to achieve the expectations that we've outlined, which is sequential top line growth for this year and the subsequent 2 years at least, we may be able to improve against that position depending on what the competition does. And while scale at that point doesn't really matter, it sort of matters in terms of your operating margins. And scale does matter in other ways, your ability to attract talent, their ability to retain talent, your ability to have financial resources that allow you to do absolutely anything. And by the way, anything of a lot in this business. Your ability to withstand the inevitable bad news, which occurs now and then. All of those things are benefited by scale, and we are now a scale player. But as I've said, and you know because you followed us for so long, we spoke so many times, we're not a management team who looks a quarter or a year down the road. We look 5, 10, 15, 20 years down the road. I've been in this seat for 17 years, shockingly enough. When I got to this company, we were -- I don't know if we were #20 or #30 in the business, but we were left for dead and no one would have expected we'd be the #2 pure-play company 17 years later. I can tell you, we wouldn't have been that if we were looking at a quarter or a year down the road because, had we been doing that, what we have done, we would have shut down our sports business. It was losing $30 million a year in 2007. We never would have invested in new IP like Borderlands. It was super expensive and incredibly risky. We wouldn't have bought Socialpoint. We wouldn't have been in a position to spend $12.7 billion to buy Zynga. None of these things would have happened. And I would argue the company wouldn't be in existence today if we've taken that view. So now what does that mean for the future? It means that we're looking -- this team is not looking to the next 3 fiscal years that Nicole and Lainie have outlined for all of you here. We're looking for 5, 10, 15 years down the road, and we have a vision for what that looks like, obviously, it involves worldwide domination naturally. But it -- what it looks like is taking the position we're in now and pressing that advanced recognizing that our competitors are not standing still. Our competitors are not sitting around saying, yes, have at it, you go do it. Our competitors are trying to figure out what comes next. They're trying to make kits. They're innovating. They're trying to be creative. They're trying to be efficient as well. So what do we have to do to continue to succeed and deliver outstanding returns, which is our history. We've had our ups and downs, but in the fullness of time, our returns have been breathtaking. The answer is we need to check the box of the unknown unknown. We have to recognize, this is not a mature industry yet. It's not going to be mature in 5 years. I don't think it will be mature in 10 years. So that means that 10 years from now, we're going to be having -- assuming -- I'm still having these conversations and I sure hope I am. We're going to be talking about a very, very different business. And if we haven't innovated meaningfully if we haven't delivered on our strategy meaningfully, if we weren't willing to take the risk and invest judiciously for that future, then we won't deserve a seat at table, nevermind have one. We do it right. I'm going to be talking to you about stuff that you haven't even convened of today because this is such a dynamic and growing space.

Your comments remind me that when I was a very new senior analyst, I had a vocal short seller called me and tell me that I kept on buy in your stock, I was going to lose my job...

And here we are.

Thankfully, 17 years later ...

we have some great here.

You guys have a few, yes.

Yes. I had some interesting conversations along the way myself. To remind people, we have a liquid security you can sell if you're unhappy.

When you announced Zynga deal, you talked about the potential for revenue synergies between the 2 organizations. And I think most of us took that to mean, hey, Zynga can help us bring some of our really valuable AAA IP over to mobile. Are you anywhere down the road in that process? Is that part of your multiyear pipeline plan that you talked about? Or is that still sort of on the come?

So you're trying to ask it that way -- I mean, what you're really saying is you haven't done that, what happened. And the answer is, and I said it at the time, I said, listen, that is one opportunity to create revenue synergies. But arguably, it's not the best one because even mobile titles based on traditional core stablished IP could fail. And the biggest titles in mobile are, of course, native. Now what people are really saying they didn't say it this way is, why don't you just do what Call of Duty: Mobile did. But the answer is Call of Duty is like as a superset -- nevermind, a subset, a superset of one. Like basically, everything else has paled by comparison in our space. So we understood then and still now that the biggest kits in mobile tend to be native to mobile, Match Factory being a great example. That said, I would love to be able to announce a successful mobile title based on legacy Take-Two IP, and I'm pretty sure we'll be able to do it. But you're right that it has been back burnered a bit in service of a bunch of other opportunities. So the biggest revenue synergy created among the organizations, now we're one, but we were 2, is our direct-to-consumer platform for mobile, which has become really important to us. That was essentially a JV between Zynga and Take-Two, like day 1, and now it's a very significant business. And the margin -- the incremental margin driven by our D2C business in mobile in and of itself, basically ticks the box of our expected revenue synergies, if you -- because revenue, you don't care, it's the margin you care about. So basically, the margin driven by that has ticked that box. But would I like to do exactly what you said? Absolutely. Have we done it yet? We have not done it yet. Is it in our multiyear pipeline? It is in our pipeline. But that doesn't mean it will succeed. It could fail, which case, it would be irrelevant. No, worse than irrelevant would actually cost us money because failures cost us money.

But you have to think about that.

But we have to try and we will try.

Yes. So I'm going to ask you a question on AI, but I'm going to do what most tech analysts do and frame it a little differently. If I think about the history of the video game industry, 40 years or so of being a mass market entertainment industry, there have been a lot of major technological advances. And in that 40 years, the price of making video games has only ever gone up. And that's because it's a very competitive industry.

And if you don't make the best product, your competitor will and you lose.

So when you think of what AI can do, I mean a lot of investors ask me, is it going to reduce the cost of making video games? My answer is typically, No, I don't think it will. It may reduce the cost of some aspects of making video games, but that money will get spent elsewhere to make the game better. What it will probably do is expand what's possible in video games. So me having framed the answer, do you agree or disagree with what I'm saying?

I'm mostly agreed, actually. Look, we've been in the AI business since the beginning of the business, of course. And we've seen numerous tools created for our business set, they yield efficiencies. And despite that, of course, as you said, the cost of making games has gone up. And it hasn't gone up because there weren't efficiencies created by those tools, those efficiencies are created and that allowed us to turn our attention to more complex activities that continue to engage and delight consumers. I'm pretty sure the same thing happens. So what happens is generative AI will allow us to do a bunch of things more efficiently. So we'll turn our attention to other things. And those other things will probably still be costly and time consuming. I can only think of one entertainment business in the history of the electronic entertainment business where new technology actually reduced production costs meaningfully. Anyone to take a guess? What is it? It's only one that I can think of. Come on you follow the -- you don't just follow interactive entertainment, you follow entertainment, recorded music. So when I was in the recorded music business, which was in the '90s, to create a really high-quality studio album costs like basically at least $1 million. And today, we could take this room and with probably $2,000 of insulation and equipment, we could create and obviously, a willing artists. We create -- could create an album that sounded really, really, really good. And probably the total production cost, if you exclude top like physical production costs would be, I don't know, $25,000, $50,000 really. So that's a really meaningful change. But I don't -- I can't find any other example of that. So for example, animation, film animation used to be all hand drawn. Today, it is not, it's created computers, but it costs a whole lot more to make a Pixar movie today than it cost to make a Mickey Mouse movie in the 1920s, late 1920s. So I think the same thing happens here. I think we just -- we increased our expectations. I also don't think for a minute that generative AI is going to reduce employment. That's crazy, okay? It's actually crazy. It's not going to make people irrelevant. It's going to change the nature of certain forms of employment. And that's a good thing. So the analogy I'd like to give, and I'll try to make this interactive. So in the 150 years ago, so mid-1870s, what percent of the U.S. population made its living in agriculture. Anyone? 70%, yes, close. You and I, of course, were around then, but now it's 65% to 70%. What percent of the U.S. population is involved in agriculture today. Now we feed all of them in America, and we feed a lot of the rest of the world, what percent? Between 1%, 2%, around 1.5%. When was the last time you ran in someone has said, it's horrible. I cannot get a job as a farmer. I mean I just can't believe it. I've been trying I'm unemployed, no farming job for me. The answer is we do not want to get our hands dirty farming or most of us do not. By the way, farmers don't get their hands dirty anymore because it's automated and we have massive farms. So the same thing will happen. You have a moment in time where certain people will be put out of work by AI. An example would be like routine call centers, not high-tech complex ones. But for those of you who shop online, a little box opens up and says, Hi, I'm Bob, how can I help you shop for a couch today? You do know that Bob is AI, right? You're aware that Bob is not Bob, right? So that's -- but the person who was Bob who was 3 years ago was sitting in a call center in India, like they're doing more interesting work now because these are competent people who are highly educated and better jobs came along that probably pay them more. So believe it or not, like I'm going to chat, WhatsApp chat with a bunch of Silicon Valley CEOs. And like the conventional wisdom out there is like AI is going to make us all unemployed. It is just the stupidest thing I've ever heard. The history of productivity tools is that it increases employment. It increases value. It increases yield. It enhances growth. All of these things will happen or said another way, remember, the paperless office. Anyone remember the paperless office? Guess what, we consume more paper than ever before despite the fact that no one here has file cabinets, we consume more paper than ever before.

All right. Well, we're at time. Strauss, thank you so much.

And on paper, I guess we're ending there. Thank you som much for you attention. Really appreciate it. Nice to see you all.