Take-Two Interactive Software, Inc. ($TTWO)

All right. Thank you all for being here today. My name is Doug Creutz. I'm the senior media and entertainment analyst at TD Cowen as PSA, I'm sure you all know the Extel voting window is open. TD appreciates your vote as do I. And I'm very pleased to have with me here today, the Chairman and CEO of Take-Two Interactive, Strauss Zelnick.

Thanks, Doug. Nice to be here.

I have been joking with clients that artificial general intelligence is like GTA 6. It's always 12 to 18 months away. But I'm going to have to retire that joke. because we are now less than 6 months away from GTA 6. We do think it's going to be the biggest entertainment launch of all time, which is a high bar. So how do you define success for a product like that beyond revenue units? And how does Rockstar define success? And what's their ambition for the product?

Well, we are aiming to make in everything that we do, the greatest entertainment on earth, that's our goal. Our goal is to make phenomenal entertainment. And our strategy is to be the most creative, the most innovative and the most efficient company in the entertainment industry. And each of our labels in its own way tries to create something extraordinary in everything that they do. And sometimes we fall short, of course, and that you probably put a fine point on that at Rockstar, given the Medicritic scores that they've always enjoyed and the breathtaking success of Grand Theft Auto and Red Dead and other intellectual properties of Rockstar has brought to market over its 25-year history. So you can imagine that the ambitions are very, very high. and both for Rockstar and for Take-Two. But I think you would define success. You can't help it in terms of the scores at it gets or views it gets, and the unit sales.

Do you think about it in terms of engagement over the long term?

Well, of course, we can't help thinking that way because Grand Theft Auto V has thrive through 3 console generations and is sold in 230 million units. So -- and it's been around for the better part of 13 years and shows no signs of abating. And Grant with Auto Online, of course, remains a very powerful property. And you've seen the economic effect of that title when Rockstar generates meaningful unit sales year in, year out and also has significant recurrent consumer spending year in year out. We've also guided to significant current consumer spending going forward for Rockstar.

Yes. And you anticipated my next question you had on your earnings call last week.

It's amazing how you can anticipate the next question -- when you provide them to our Head of IR, Nicole in advance, are have incredible mental capacity to read.

You're giving away our -- so yes, you did guide to GT.

I see if you guys are awake. And at these conferences, like it's just to get a smile you all is challenging. So I'm so gratified total I don't want to be in the third slot today. Sorry, go ahead.

So you did talk about GTA recurrent consumer spending growing this year. And I know you're not going to you're not going to divulge sort of what the plans are for GTA 6 launch. But can you talk about what Rockstar has learned from GTA Online and Red Dead Online in terms of running a successful live service title what they may have learned from observing other parts of your portfolio like NBA 2K and Zynga or even looking at some other high-profile live service launches in the last few years that haven't gone well.

So remember, we have live services at Rockstar now, right? We have GTA Online, we have GTA. We have the FM business. So we already have that in market, and we expect those businesses to continue to thrive. There'd be no reason that they would not -- and what have we learned? -- give consumers something great and they show up for it. We've learned the oldest lesson in the entertainment business.

In terms of how getting the mix...

By the way, that leads me to a story, which is true. So I started in the movie business in the television business. And Columbia, I worked to Columbia Pictures. And the -- I bet there's no one here who knows but the head of Columbia picture is in its heyday, Columbia Pictures was a B studio going back into the old days. And the head of Columbia Pictures was a guy named Harry Cohen. Anyone know this. This is a true story. And Harry come was detested, reviled in the movie business by everyone. And so much so that there were some amusement at the fact that people were at as funeral -- and 2 stories about that. One is someone said to, I think, Jack Warner, but I'm not sure, why do you think there's so many people at Harry Con's funeral. And he did say give people what they want, they come out for it. And a true story and the rabbi who officiated at the funeral was a famous rabbi in Los Angeles name, Ravin Magnan. And someone went up to him and said, Ray, you must be able to say something nice about Harry Colin. I mean this was Delray at the funeral and he said, he's dead. Okay. But I digress. Anyway, you give people what they want, they come out for it.

That is true. If we look...

You can look it up, both are true stories.

If we look beyond GTA 6, I'd imagine a few things are probably...

I'm trying to divert you. It's just now.

I know. I know I'm going to talk to move on from -- I would think Rockstar would probably beyond GTA 6, not like to have another 13-year gap between GTA releases. Maybe not. I mean, obviously, GTA 5 has done very well. And I assume Rockstar has other ideas that they'd like to pursue beyond just GTA. So how are you and they thinking about how they evolve over the next 10 or so years to best serve their audience and create value for the company organizationally?

The only way I can answer that is to say these are the very conversations we always have with all of our labels, Rockstar included. And we have a plan. And our plan might not be to have a specific cadence around our properties because we're not a cadence-driven company. We never have been. We know I didn't show up but take tune, nearly 20 years ago and say, the way everyone else was, we're going to annualize our products like Clockwork to the contrary, and I was an outlier at the time, I said the only products were in annualized or sports entertainment properties, we are specifically not going to do with everything else. I was very unheard of in the business at the time. And the thesis was that if you do that, hey, you're going to burn off your intellectual property because you're in market too often b, you can't possibly deliver the kind of quality you need to deliver to deliver an A+ property by doing that. And -- I'm not going to name the properties, but we've seen that some very competitive properties have had good annual releases and bad annual releases because it's just so hard to do -- and also, if you take a look at the intellectual property landscape when I joined Take-Two in 2007, GTA was not the #1 property. It was a top 5 property, but it was not the #1 property and take a look at what happened to the properties that were higher up in the food chain that were annualized to see what happens. So we set a new standard in the business, which is you have to make stuff that's great and creating some anticipation on the part of the consumer is a good thing. That doesn't mean that we said there should be an ex year gap between releases. What has driven the gap is the amount of time it takes to do something that is as good as it can possibly be for that intellectual property. And sometimes, for example, with Borderlands, Gearbox has done a great job coming to market somewhere between 2 and 4 years after in a release. And generally speaking, succeeded mightily at doing it. And in other instances, for example, BioShock, that's taken longer than we would like. In the case of GTA 5, it was not a simple story of like, wow, guys, it took you a long time to come back to market because look at what Rockstar launched. Again, they relaunched and they actually remade the title for PC. They relaunched and remade the title for each new generation, and they launched GTA Online plus other services that were either required to launch. To the extent that GTA has become a thriving business, that's an ongoing business. So it's not as simple as, wow, what have we been up to for 13 years? The answer is they've been up to quite a lot. And I think one of the reasons that GTA 6 is so widely anticipated is that we now have a GTA ecosystem that Rockstar built.

I would imagine that it's not as simple as saying, "Oh, let's just pour more resources into Rockstar that they probably are finding the right people to work in that environment. It's probably not the easiest thing in the world.

Look, we -- again, I'm not to name names, but a very big resource heavy company went into the video game business about, what, 12 years ago. And they've had one title that was moderately successful. It is not about headcount. It is not about technology. I know you'll get to that. It is about the intersection of talent, passion and resource that creates hits and -- so it isn't as simple as let's hire more people, obviously, have to hire the right people and then manage them the right way with the right creative vision in the first place and then with daily attention to execution, which is ultimately my job. -- right.

Let's move on NBA 2K, another very big franchise. You had a tremendous run over the last couple of years, double-digit RCS growth. Can you talk a bit about...

And a huge year this year?

Yes. What they've gotten right to drive all that growth and you did guide to, I think, 7% growth in the coming fiscal year. what lends you the confidence that you can continue to grow it off of such a office?

We hate talking about what we got right because I'm a big believer that arrogance is the enemy of continued success. And the team at Visual Concepts, if Greg Thomas, we're sitting here, he would be happy to tell you all the things that we got wrong and all the things that we need to do better at. And I sort of would dive in. But because I didn't actually create the title I can complement the team appropriately. I think what they got right is this wonderful intersection of phenomenal sports simulation game with the creation of a culture and the importation enhancement of the world's surrounding basketball and that you have the ability to show up in that title in NBA 2K and MBA online and play the game or engage with the culture of the game or both. And I also think that Greg and his team at Visual Concepts do a great job of listening to the consumer and making sure that enhancements are in service, not of like enhancing revenue, but in service of creating a better experience, if we create a better experience, the revenue should follow. So while we're happy here at an investor conference talk about setting records for unit sales and revenue related thereto and recurrent consumer spending that comes from meeting the consumers' needs, exceeding their needs, exceeding expectations and getting up the next day and doing it again. And in certain instances, making changes when we've gotten feedback they're like, no, this isn't what we want. So I think the reason the game has done so well in the past couple of years, it's an amazing game. Just a great, great game. By the way, not the only great game in market. we're running scared at all times. And our friends at EA have the #1 sports title worldwide in FC. So we know what the competition has and we know what we got to do to continue to win?

Do you feel like there's still a lot of untapped opportunity outside the U.S.?

It's huge. I mean basketball is a growth sport. It is growing outside. There's no secret that there's a lot of attention around growth in Europe. And we're very optimistic about where European growth could lead, but also growth in developing markets. And that's a broader theme at Take-Two, where we're very focused on growing developing markets. So remember that the nature of a multinational interactive entertainment company today, unless you're a Chinese company is that 80% of your revenue comes out of the U.S., U.K., Western Europe and little pockets of Asia. And you're not serving at all in a meaningful way, Russia, Latin America, India, Africa and the Middle East, and we want to change that. And so we are aggressively building up our international market's presence which is challenging because it requires you to invest in advance of revenue, something we hate to doing, but we are doing that.

And can you talk a bit about opportunity with college [indiscernible] that you see?

Well, I mean, there was a mode. I think the team at 2K and Visual Concepts did a great job getting to market so quickly on college basketball. And consumers loved it, but it's early days yet. There's much more to come. I think it were 16 or 17 universities represented. It was a really great start.

As a Duke basketball fan, I'm excited to see.

More to come -- much more to come.

Let's talk about some other things that you've talked about coming in the AAA side. You've announced Judit, you've announced project Ethos I think you said last week that you would have 7 AAA SQLs in total in fiscal '28 and '29, which I assume includes the BioShock sequel that you've talked about. And as you mentioned earlier, BioShock has been growing for a long time. Judith, I think you announced in 2022. When you think about value creation of the company beyond GTA, how important are these titles to that?

Incredibly important. And I mean, Lane is sitting here, but I think in the past few years, GTA's total business has been less than 15% of our overall net bookings, if I have that right. So 85% of the company has not been about GTA and that is no way to detract from its importance is title, obviously, it's to make the note that we're a big diversified company with lots of hits, and we have half of our business is mobile, of course, and half is console and PC. So our job is to grow in all directions because we're serving consumers everywhere. Every kind of consumer wherever they are and however they want to engage. That's our job. That's what we're trying to do. It's our mission. And in this past year -- past fiscal that we just reported, of course, all of our labels did better than expected. So the goal is not to work on one title at a time, right? The goal is to build up our business by delivering great hits and to have largely owned intellectual property that we can bring to the consumer over and over again. So we have 11 franchises. Do I have that right, that have each sold over 5 million units. It's up to 13. And those -- when I showed up here, the number was, one, to be clear, 1 and this is really hard to do. And I'm not really in the business of padding our collective selves in the back, but no one else has done that. No one else has done. And we have invested heavily and sometimes had failures and missteps in so doing. But the reason our company is as valuable as it is, is because we have all these franchises that deliver over and over again. And in most instances, actually sell more units with the new iteration in the prior release not every situation, but most, which is a real outlier in the business. And again, a reflection of our willingness to invest behind quality.

I'm sure you've seen some exact and former exacts in the last several years have said that they think AAA development costs are becoming unsustainable in terms of the amount of money that has to be in and the risk of failure. Like how do you think about that?

They're not wrong. I mean -- but this is -- it's odd that you would say this, but the cost of making the best entertainment on earth is actually an entry barrier. And so you don't want to go up against that from the outside -- but when you're in the inside if you're judicious and you're careful about your capital allocation, 1 could argue it's actually a benefit because you have fewer high-end competitors. That's relying upon the fact that the money is well spent, which is to say that you're making hits. So -- it is a game for the big boys. The entertainment business at maturity is always a top 10 or 20 business, always. And if you think otherwise, you're kidding yourself. It is not a long tail business. It's a long-tail business when you're in the top 10 business. That's great. Like we have a terrific catalog. It generates revenue and cash flow year-on-year. We have terrific live services generates revenue and cash flow year in, year out. But the locomotive for all that is the front line and the front line has to include sequels and new intellectual property, if you want to be in a more powerful position in 10 or 20 years than you are today. And that's our goal. We've been -- this management team has never looked at the business quarter-to-quarter, as you know, I don't. And as you know, we're willing to do things that other people would see as unnatural acts because we don't look at things quarter-to-quarter. We're building this business for 5, 10, 15, 20 years, hence, even though the odds of my sitting in the seat in 20 years are reasonably low, but hey, you never know. So -- but that's the goal. And the reason that we have the market cap we have today is because I looked at that 20 years ago, when we had a $700 million market cap. I wasn't playing quarter-to-quarter. We've made a lot of really hard decisions. And by the way, we were in the wilderness for quite some time. And then we were undervalued for quite some time where people are like, is this real? And then finally, it began to come to fruition, but did not happen overnight. And now we're in this incredible position of luxury, what a terrible shame it would be if we incinerate it by now thinking short term. So yes, we're going to have to invest a lot of money behind our creative teams if we still want to be delivering the best entertainment on earth. We have to be judicious with our capital allocation. We have to be thoughtful. And at times, we're going to have to take hits because we were wrong. But if we get it right, and I do believe we'll get it right with Grand Theft Auto and with BioShock, and I hope with Ethos and with many other titles, we do get right with NBA 2K. These are immensely profitable enterprises despite high production costs. and high marketing costs.

I've always said to clients, there's no amount of money you can spend on a hit that's too much and no amount of money you can spend enough flop that's too little. And that's just how you have to press.

We try not to spend much on the flops. The best thing is like when you put out something that doesn't work and you run it some -- this has happened to me also in the movie business more typically, but running some of the cocktail party and they're like, why did you make that horrible flop. It's like because I thought it was going to be a hit. Like, what do you think? I thought like that would be a good idea. Let's do that even though it's going to be a flat because I thought it was going to be a hit. Where it's a little more complicated is mobile because you kind of don't know. So the way we have addressed that is meaningfully to reduce our exposure prelaunch in mobile. When we took over Zynga, they had a couple of projects that had huge numbers attached to were legacy projects. We don't do that anymore because the hit ratios are so low in mobile, it just doesn't make sense. And really to focus mightily on fewer than 10 new launches a year in hopes of having 1 or 2 hits a year. that strategy has paid off. It's what led to color block jam and match factory and some titles that are doing really well that are somewhat smaller than that. And we hope that we'll be able to do that year in and year out. But what we have done in mobile has gotten out of the business of spending massive amounts of money where the hit ratios just don't bear up. And mobile is essentially a direct marketing business on the marketing side, whereas PC and console releases feel more like brand marketing. So we do a bunch of performance marketing. But when you market a PC or console title, it's a lot like marketing a movie release in the old days for me. Whereas marketing mobile titles much more performance direct marketing. And I have a whole history in the old-fashioned direct marketing business. And 1 thing about direct marketing is it's very difficult to predict. It's the data that tells you the answer. So if you're in a situation where you can't predict, like we doubled down on GTA because we believe, okay, if we get this right, it should do really, really, really well. But you can't double down in a mobile title because the hit ratios are just too low. So I can't tell you the numbers, but it cost us. I mean, it's like a rounding error to get to market on color block can. It was just very, very, very low. Now then you have to invest in marketing. So equally match factory, wasn't a rounding area, but it was an inexpensive title, but then we had to really spend the marketing and we made no bones about it. We were public about it. And it takes a while to get your money back when you do that, too.

Yes. And you've had a great year in mobile. You grew 13%.

Yes, Frank Gibeau and the team at Zynga have done a phenomenal job.

You've also -- I mean, you talked about your new titles, Tune blast, which is a much older time.

That's 14 years old and just set a record, it's incredible.

Yes. I mean what's been the driver of that incredible growth spurt this long after launch?

It's been engaging with the legacy consumers. It's less about DAU growth and much more about engaging with the consumers who love the title and giving them what they want.

Do you feel like -- you talked about how much you have to invest in marketing to have a mobile channel have a chance of success. Is that as much of a barrier to entry on mobile as development costs are for console?

It's a great question. And the answer is yes, it really is. So the good news is you can actually -- especially the out, you can develop a mobile title really cheaply and get it to market. But if the payback period for the marketing is 2 years and there are companies that think 2 years too short. So we have direct competitors who spend up to like 5-year paybacks as far as we can tell, which we think is insane. But either way, think about what you have to spend start getting positive cash flow. So you -- there's -- the entry barriers are enormous unless you create something that's actually a viral hit. And that doesn't really happen anymore. I mean there are outliers, but they really are very few and far between. I can't think of one. So our friends at Scopely, for example, spent a massive amount of money on MONOPOLY GO now paid off. It's a very profitable title. It's a huge title but they spent an enormous amount of money supporting the marketing before the money came back, and we spent a lot of money on other titles. So yes, it's a huge barrier to entry in mobile. There's a whole little business actually growing up of independent companies that are financing UA for mobile companies. So I don't know if you know this, but they're all private. So I'm not going to help you all out. But there are probably 5 companies that have raised private capital and they finance UA and then they take it back off the top.

Is there edge that they are really skilled at it? Or is it...

That's their idea. I mean, if they're not really skilled at if they're not going to be around very long. But so far, I'm one of them -- one of the guys doing that used to work for me is super talented and -- it's still a small business because he does have to be very selective, but it's working.

Right. You've talked about direct-to-consumer as an important margin growth vector for mobile. And we've seen -- there are some companies that report percent of total revenue, it does seem like there's been a big acceleration of companies like Playtika in the last year in terms of they're getting up to 40%. How is that going for you? And do you see a lot of continued runway there as margin growth driver?

It's going really well. We are not direct to consumer in every one of our mobile titles, but we're nearly there. We don't talk about the percentage, but it's meaningful. And in fact, if you go back to the comments I made during the Zynga acquisition, when we talk about synergies and particularly revenue synergies, I outlined as 1 of the areas of revenue synergy going direct-to-consumer. And we vastly exceeded our expectations that we laid out at that time. Because at that time, direct-to-consumer a Zynga was 0% of the revenue. So it's a whole lot higher than that. At the same time, we are not -- our strategy is not bring people to our company store to increase margin. Our strategy is to be the best entertainment company on earth by delivering more hits than anyone else and delivering them to consumers where they are and how they want to consume our titles. That's our job. And so if they want to buy stuff from a store, as long as that store treats us fairly, and protects our intellectual property, we're going to be in business with that store. I do think that third-party distribution costs will go down. partially for regulatory reasons, partially as a result of litigation and partially and probably most appropriately as a result of competition. And -- but third-party stores are important to us because they market our titles, too. And they are really good partners to us. So you can't ask someone to be a good partner on the one hand and then grab their wallet on the other hand. So we're -- it's a balance. There are consumers who want to engage with us directly great. We'll do that. There are consumers who want to buy through the store. We'll do that just want to be treated fairly when we're at the store.

Do you feel like the third-party distributors are already becoming better partners because of the pressure that they're seeing from potential?

Well, they've always actually been really good partners. They've just been price partners. And I do think that they're -- I do think third-party distributors understand now that those costs have to come down.

Yes. Okay. Just stepping back a bit, there's been a lot of handing about the video game industry over the last few years. Obviously, there's a lot of layoffs across the industry, at least a perceived lack of market growth, whether that's true...

It's actually not the stats I've recently seen from [indiscernible] growing margin.

I mean, I agree but this is what I hear and this is a we really what Mathew ball wrote Yes.

But actually, it's not been borne out in what we're seeing, but we've done incredibly well and much as I would love to take full credit for that. I think we have felt industry tailwinds. We really have -- we certainly have not felt headwinds. We felt a lot of headwinds in 2022, mid-'22 in both mobile and console. We saw it post pandemic . That's not what we're seeing that. We're feeling modest tailwinds.

So you feel -- if you looked at the next 5 years, where do you think the opportunity is for the industry you feel good about.

Oh, my god. And it's breathtaking for -- and I'll give you 2 big reasons, put everything else to the side, streaming and developing markets. Those are 2 areas of focus for us. So will streaming technology bring PC content to consumers who previously couldn't get it because in the PC's UBET. What is a big barrier. It's obviously latency. And there are numerous companies, both domestically and internationally, that are addressing that. And in the U.S., I think it will be edge network driven outside of the U.S., it will be driven by things like StarLink. And it won't work for every title but it worked for some. And it certainly does not mean if you've got whatever, I don't know if there are 8 billion people and you got like 2 billion or 3 billion phones and you've got an installed base of console of under $200 million. It does not mean you're in a 10x the market, obviously, because avid consumers are in the console business or in the PC business. It does mean, though, that I think you're going to meaningfully address consumers who previously could not consume your products. So streaming should be really huge for us. And then the second thing, as I mentioned earlier, developing markets. we've got well over 1 billion people that we can serve in India that we do not serve now, just by way of 1 example, 500 million people in the Middle East, so we do serve the Middle East, but not as effectively as we aim to do in the future. So we can't have a TMT conference these days without discussing AI. By the way, I got invited to a dinner, and it was like 1 of these think-tank dinners and it was like, would you please come to dinner on June blast a small group of people to talk about AI. And I am very played person, which you know. And generally, I would say, I'm sorry, thank you very much for the invitation, but I can't make it, but I just couldn't help myself. I wrote back and I said, I can't spend 5 minutes having another discussion about AI, but thank you for the -- I did actually say that in cannot do it. And clearly, the person I sent to you did not read the response like you'll come in on the -- it was probably a not to discuss AI. I won't. But anyway, I'm going to -- we only have 25 second board I've never liked to clock so much please.

Exactly another company I cover, so that AI is ultimately going to allow a team of 3 people to develop a GTA class game within a week. What's your view on that?

That would -- wouldn't that be great for us -- that's not a -- anything that we have a 3-part strategy. It'd be the most creative, be the most efficient be the most innovative. And if we have tools that allow us to be more innovative, more efficient and more creative, we're all in those. That's what we've used tools for before. I think the problem with the conclusion that people reach when the executive says that is -- and therefore, they will make a hit that's as big as GTA and there's 0 evidence for that. Because we've had technology forever that would allow people to recreate what we do. Maybe it's not done in a week, but who cares. Given how much GTA is worth, if you could make something that's as good as GTA and performs as well, would it bother you that it currently takes 13 years? Of course, not. Like why wouldn't you do that? So -- and people have tried. Anyone run into assassins create. I mean people have tried to make titles that competed directly with GTA. And by the way, this isn't by way of by saying no one could ever compete with us to the contrary. I'm simply saying that the ability to use tools to create intellectual property is totally different than creating hits. It's just a different exercise. And there anyone see the 007 early reviews and early scores, like it's done by my friend, Casper Daugaard and his team, and it looks phenomenal. looks great, and they're outside of the major studio system. that is absolutely possible to make something of great quality. And if tools allow you to do that, great, but they will also allow us to increase our quality and increase our efficiency. The making a hit is different than making an asset. They're just different things. And I have no doubt that technology is going to allow us to make better assets more efficiently. Like that's the history of technology, but making hits, making hit seems to get harder and harder and harder as entertainment industries mature. We do not have a monopoly in hit creation. As I said earlier, arrogance is the enemy of continued success. I don't believe for a minute that technological advances give someone else an edge or give us an edge. It's just the tool set. It's available to everyone. And the key thing is that all this is going to be totally commoditized, Show me one AI company, just one who's offering their services or products to companies on an exclusive basis. they don't exist. So when that executive has that button to push, I'll have the same damn button. And the folks at Rockstar seem to be able to make these massive hits and lots of other people have tried, lots and lots, including former Rockstar employees. And so far, they haven't been able to do it. It doesn't mean they can't in the future. By the way, we're always running scared. but it won't be technology that changes the game. That won't be the change. What will change is that some extraordinarily creative individual or individuals are going to show up and do something astonishing. Our goal is to get those people to work within the Take-Two system. If we fail to do that, we fail. If we continue to be the home of creativity, the company that welcomes and encourages and supports and finances the best talent in the business, then the rest will take care of itself and technologies in service of those goals, not at odds with them.

That's great. I don't think that was 5 minutes. Thank you so much.

Thanks for having us. Thanks so much. Thanks all.