Take-Two Interactive Software, Inc. (NASDAQ:TTWO) Q3 2024 Earnings Call Transcript

Take-Two Interactive Software, Inc. (NASDAQ:TTWO) Q3 2024 Earnings Call Transcript February 8, 2024

Take-Two Interactive Software, Inc. misses on earnings expectations. Reported EPS is $0.71 EPS, expectations were $0.72. TTWO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to Take-Two’s Third Quarter Fiscal Year 2024 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference call over to Nicole Shevins, Senior Vice President of Investor Relations and Corporate Communications. Thank you. You may begin.

Nicole Shevins: Good afternoon. Thank you for joining our conference call to discuss our results for the third quarter of fiscal year 2024 ended December 31, 2023. Today’s call will be led by Strauss Zelnick, Take-Two’s Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks. Before we begin, I’d like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us.

We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors. These important factors are described in our filings with the SEC including the company’s most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I’d also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year-over-year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance.

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

Strauss Zelnick: Thanks, Nicole. Good afternoon and thank you for joining us today. I’m pleased to report that we achieved solid results, including net bookings of $1.3 billion. Our performance reflects our unwavering commitment to quality, the ongoing contributions from our outstanding portfolio, which is one of the strongest and most diverse in the entertainment industry, and our immensely talented creative teams. During the period, Grand Theft Auto V, Grand Theft Auto Online, the Red Dead Redemption series and Zynga’s in-app purchases, led by Toon Blast, exceeded our plans, driven by engaging new content, partnerships and activations. This was partially offset by some softness in mobile advertising and sales for NBA 2K24.

2K is implementing measures to enhance performance for the title, such as offering new events and promotions and delivering an exciting and engaging content lineup. We expect lifetime net bookings for the title to be in line with NBA 2K23. Due to these factors, a planned release moving out of the fourth quarter and increased marketing for Zynga’s new hit mobile title Match Factory!, we’re lowering our full year outlook. While the timing of Match Factory!’s user acquisition expense will reduce our profitability in the current fiscal year, we believe that this investment will allow us to grow our audience meaningfully and increase the lifetime value of the Match Factory! franchise. We have always managed Take-Two for the long-term and we have great confidence in our groundbreaking pipeline for fiscal 2025 and beyond, which we believe will enable us to grow our net bookings, increase our scale and enhance our profitability.

At the same time, our teams are always looking for ways in which we can operate at the highest level of efficiency, which is one of our core tenets. We’re currently working on a significant cost reduction program across our entire business to maximize our margins while still investing for growth. These measures are incremental to and even more robust than our prior cost reduction program, and we aim to achieve greater operating leverage as we roll out our eagerly anticipated release schedule. Turning to the performance of our titles during the quarter. Momentum for Grand Theft Auto remains phenomenal. Sales of Grand Theft Auto V exceeded our expectations during the holiday season, and to date, the title is sold in more than 195 million units worldwide.

During the quarter, Rockstar Games released its holiday update for Grand Theft Auto Online: The Chop Shop, which captured the highest number of active users in several years, including the largest ever increase in new Grand Theft Auto Online accounts, driven by the variety and depth of new vehicles in robberies, positive community sentiment and the game’s inclusion in various subscription services. The Grand Theft Auto series is also benefiting meaningfully from excitement surrounding Rockstar’s announcement of Grand Theft Auto VI and the release of its first trailer, which, at 93 million views in 24 hours, broke YouTube’s records for a non-music video launch and, along with partner channels, became the biggest video debut ever. Rockstar’s recent partnership with Netflix to launch the GTA Trilogy is also a resounding success, quickly yielding the highest rate of installs and engagement on the subscription services game platform.

In addition, Rockstar’s membership program, GTA+, continues to grow rapidly, powered by enhanced benefits for members, including a rotating assortment of classic Rockstar titles. Red Dead Redemption 2 also surpassed our plans, as our exciting holiday promotions and events resonated deeply with players. To-date, the title is sold in more than 61 million units worldwide. During the quarter, Rockstar Games supported Red Dead Online with free updates, including the new All Hallows’ Call to Arms locations, a trio of new Dead of Night maps and a Hardcore Telegram Mission alongside the return of the Halloween Pass 2. NBA 2K24 remains the number one basketball simulation experience in our industry and, to date, is sold in over 7 million units. Unit sales for the Gen 9 version of the game are growing at a double-digit percentage increase over last year due to an enhanced gameplay experience and wider console availability.

As players migrate to Gen 9 platforms, we are seeing significant declines in demand for our Gen 8 offering. Players have been highly engaged with many of NBA 2K24’s new features, including a Season Pass that helped average revenue per user grow 30% year-over-year. On October 6, 2K and Gearbox Software launched the Borderlands 3 Ultimate Edition for Nintendo Switch. We’re pleased to expand further our beloved franchise by enabling players to make some mayhem at home or on the go with this thrilling high stakes adventure. Now turning to Zynga. We’re very pleased with the team’s ability to create successful new mobile games, including Peak’s Match Factory!, which launched on iOS in November and Android in late December. The title is a top 30 grossing game on the Apple App Store in key target markets, such as the U.K. and the U.S., and has shown stellar retention and monetization metrics on par with previous category-leading Peak titles such as Toon Blast.

Based on these excellent metrics, we see strong long-term potential for the title, and we’re planning to invest in new features and a robust marketing campaign to capitalize on its popularity with consumers and to scale it further. Zynga’s other recent release, Top Troops, increased its engagement by more than 10% over last quarter, propelled by the launch of new features and semi-monthly battles. Looking ahead, the team is focusing on new brand collaborations, player competitions and social and community engagements. Overall, Zynga’s in-app purchases exceeded our expectations with significant sequential improvement compared to last quarter. This was led by Toon Blast, which materially outperformed, delivering its highest ever average revenue per daily average user and over 50% growth in its daily in-app purchase revenue compared to last quarter.

While we’re encouraged by the trajectory of Zynga’s in-app purchases, its ad revenues were below our expectations due to some changes that we’re implementing in the hypercasual business, including a heightened focus on our profitability and the launch of new features that deliver blended monetization. Our direct-to-consumer business continues to grow and enjoyed a record holiday season. Our teams are working actively to add more titles each quarter to this highly accretive owned distribution channel. Looking ahead, Zynga has numerous titles in development and soft launch that we’re eager to release worldwide in fiscal 2025 and beyond. It bears noting that launching hit mobile titles is both highly complex and challenging, and we’re gratified by Zynga’s unique ability to release new properties to capture mind share and market share.

In closing, although we’re lowering our outlook for the year, we believe that our company’s potential is vast and unique, driven by our creative talent, our owned and controlled intellectual property and our groundbreaking new pipeline for fiscal 2025 and beyond. As we execute on our strategic priorities, we believe that we’ll deliver an array of unparalleled entertainment experiences that can captivate, engage and redefine our industry for audiences around the globe. I’ll now turn the call over to Karl.

Karl Slatoff: Thanks, Strauss. I’d like to thank our teams for delivering another solid quarter and adding to the continued positive momentum of our business. I’ll now turn to our upcoming launches for the balance of fiscal 2024 and beyond. This quarter, Private Division and Evening Star will launch Penny’s Big Breakaway, a 3D platforming game. Private Division will share more news about this exciting release shortly. On March 8, 2K and Visual Concepts will launch WWE 2K24. The title will feature several franchise advancements, including the 2K Showcase…of the Immortals, celebrating 40 years of WrestleMania, four new match types, two new MyRISE experiences and much more. We’re thrilled to build upon our long-standing partnership with WWE and to continue to set new creative benchmarks for this franchise.

At The Game Awards in December, Private Division announced No Rest for the Wicked, an action role-playing game from Moon Studios, creators of the critically acclaimed Ori and Blind Forest and Ori and the Will of the Wisps. The title will launch Early Access on PC in the first quarter of fiscal 2025 with a full release on PlayStation 5, Xbox Series X and S and PC thereafter. We will reveal more information about the game on March 1 during the label’s Wicked Inside digital showcase. After 13 years, we are pleased that 2K will return to tennis and broaden its sports offerings with the upcoming release of Top Spin 2K25. Developed by Hangar 13, the title was poised to provide an incredibly realistic and engaging tennis simulation featuring the world’s top players and courts.

2K will share more details in the coming weeks, including an expected launch date. Zynga continues to deliver on their outstanding pipeline with their much anticipated titles, Star Wars Hunters and Game of Thrones: Legends, each slated for global release in calendar 2024. We are encouraged by both games’ performances and soft launch and are confident that they will resonate with broad audiences when they debut worldwide. At the same time, Zynga’s hypercasual studios plan to release a steady cadence of mobile titles for games that has the potential for enhanced retention rates and a mix of in-app purchases and advertising to drive higher monetization and profitability. And as always, our labels will continue to provide new content and experiences that drive engagement and recurrent consumer spending across many of our key offerings.

Looking ahead, we remain highly optimistic about what we believe to be the strongest and most exciting development pipeline in our company’s history. I’ll now turn the call over to Lainie.

Lainie Goldstein: Thanks Karl and good afternoon everyone. We delivered solid holiday results, including net bookings of $1.34 billion, which was within our guidance range. I’d like to thank our talented teams for their commitment to creativity, innovation, quality and value, which allows us to provide outstanding entertainment experiences for our players across the world. Grand Theft Auto V, Grand Theft Auto Online, the Red Dead Redemption series and Zynga’s in-app purchases, led by Toon Blast, exceeded our expectations. This was partially offset by softness in mobile advertising in NBA 2K. Recurrent consumer spending declined 7% for the period and accounted for 75% of net bookings. This was slightly less than our outlook, driven by weakness in mobile advertising and NBA 2K, which was largely due to the effect of lower unit sales on its in-game monetization.

Recurrent consumer spending for Grand Theft Auto Online, virtual currency and GTA+ membership was up notably. During the quarter, we launched several mobile titles, including Top Troops, Match Factory! and NBA 2K24 Arcade Edition for Apple Arcade as well as Borderlands 3 Ultimate Edition for Switch. GAAP net revenue decreased 3% to $1.37 billion, and cost of revenue declined 1% to $688 million, which included an impairment charge of $53 million and $177 million of amortization of acquired intangibles. Operating expenses decreased by 10% to $808 million. On a management basis, operating expenses rose 4% year-over-year and was favorable to our guidance due to lower marketing and personnel expenses. Turning to our guidance, I’ll begin with our full fiscal year expectations.

As Strauss mentioned, we are lowering our outlook to reflect the softness we are currently experiencing in mobile advertising and NBA 2K24, a planned release will be out of the fourth quarter and increased marketing for Zynga’s new hit mobile title Match Factory!, which we believe will enable us to scale it more meaningfully to reach its full long-term potential. Our revised net bookings forecast is $5.25 billion to $5.3 billion. We expect the net bookings breakdown from our labels to be roughly 51% Zynga, 30% 2K and 19% Rockstar Games. And we forecast a geographic net booking split to be about 60% United States and 40% international. We are projecting recurrent consumer spending of 1% compared to fiscal 2023, which includes a full year of Zynga, partially offset by a slight decline in NBA 2K.

Grand Theft Auto Online is expected to deliver modest growth for virtual currency and GTA+ membership. RCS is expected to represent 79% of net bookings. We plan to generate approximately $100 million in non-GAAP adjusted unrestricted operating cash flow and to deploy approximately $150 million for capital expenditures, primarily to support our office build-outs and larger footprint. We now forecast GAAP net revenue to range from $5.27 billion to $5.32 billion. Our total operating expenses are now planned to range from $3.55 billion to $3.56 billion as compared to $3.45 billion last year. On a management basis, we continue to expect operating expense growth of approximately 14% year-over-year due to a full year of Zynga and increase in personnel marketing expenses and higher depreciation, which are being partially offset by the realization of synergies from our combination with Zynga and savings from our prior cost reduction program announced last year.

Now moving on to our guidance for the fiscal fourth quarter. We project net bookings to range from $1.27 billion to $1.32 billion compared to $1.4 billion in the fourth quarter last year. Our release slate for the quarter includes WWE 2K24 as well as Penny’s Big Breakaway from Private Division. The largest contributor to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Toon Blast, our hypercasual mobile portfolio, Empire & Puzzles, WWE 2K24, Red Dead Redemption 2 and Red Dead Online, Words with Friends and Match Factory!. We project recurrent consumer spending to decrease by approximately 5%, which assumes flat results for Zynga and a decline for NBA 2K with Grand Theft Auto Online, virtual currency and GTA+ membership are expected to be up.

We project GAAP net revenue to range from $1.32 billion to $1.37 billion. Operating expenses are planned to range from $896 million to $906 million. On a management basis, operating expenses are expected to grow by approximately 17% year-over-year, driven by the additional marketing expense for Match Factory! that I mentioned previously, higher personnel costs and an increase in depreciation, which are being partially offset by the realization of synergies from our combination with Zynga and savings from our prior cost reduction program that we announced last year. Looking ahead, our teams remain committed to efficiency. We’ve begun a rigorous analysis to identify additional areas for cost optimization. The expected savings are incremental to our previously announced cost reduction program, and we expect that it will be more expansive.

We believe that these measures will enhance our margin profile and position our business for greater operating leverage in the future. In closing, while we are disappointed to have lowered our outlook for the year, we are exceedingly confident in our growth prospects. With our industry-leading portfolio and passionate teams, we believe that we are poised to deliver the best content in our industry, reach new record levels of operating performance and deliver long-term value for our shareholders. Thank you for your continued support. I’ll now turn the call back to Strauss.

Strauss Zelnick: Thanks, Lainie and Karl. On behalf of our entire management team, I’d like to thank our colleagues for enabling us to achieve our goals and deliver another solid quarter. And to our shareholders, I want to express our appreciation for your continued support. We will now take your questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Eric Handler with ROTH MKM. Please proceed.

Eric Handler: Yes, thank you and good afternoon. Wonder if you could maybe give a little meat to the bone, so to speak, with your cost-cutting program. How much cost or net savings have you generated so far? What do you think this next plan could do and over what time?

Strauss Zelnick: Lainie will take that.

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

Eric Handler: Helpful. And then with regards to the advertising weakness that you are seeing, is that all related to what’s going on with the hypercasual business or does it extend also to in-game advertising for casual games?

Strauss Zelnick: This is Strauss. So it’s basically the hypercasual business, and we’re really optimizing the business from profitability. So there’s always a balance. We’re also seeing that we can actually have in-app payments in our hypercasual business. So it’s really moving to a hybrid model, and we’re very excited about that. There’s great opportunity in that business.

Eric Handler: Thank you.

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

David Karnovsky: Thank you. I guess, first, with some of the momentum and investment for Match Factory! and the game delay, is there any update to your fiscal ‘25 or ‘26 forecast?

Strauss Zelnick: Lainie is going to take that.

Lainie Goldstein: Currently, it’s the middle of our budgeting process. At this time, the number is tracking a little above $7 billion for net bookings for the year and given the typical shifts and tweaks that occur in our forecasting process. And this amount is still huge growth over this year. And our pipeline is groundbreaking for next year and beyond, and our teams are making excellent progress on game development. And nothing material has changed with regard to the lifetime value of our portfolio. And both will provide our initial outlook for fiscal year ‘25 when we report our Q4 and full year fiscal year ‘24 results in May.

David Karnovsky: And then just on Match Factory! It looks to be the most substantial new launch for Zynga since the acquisition. Want to see if you could speak kind of more broadly to the process of launching new mobile games, whether this reflects any kind of broader improvement in UA or content generation there? Thanks.

Strauss Zelnick: I think so. I mean, I’ve said repeatedly in the past few years that the hardest thing that anyone in the industry can do is create a new mobile hit. It’s super hard. And so much so that one of our big competitors just decided they weren’t going to try it anymore. It was off the table. We stuck with it and so did some of our competitors. So clearly, the market’s becoming more receptive and more reactive. There’s a big title from one of our competitors, Monopoly GO!, which is a huge hit. And we’re gratified obviously here to see so much traction already in Top Troops and Match Factory!. And Match Factory!’s already a top 30 title in the U.S. and UK Apple App Stores with lots of continued traction in the rest of the world, and it’s really just beginning.

We are supporting the title in the quarter, and that’s not money that we could possibly recoup in the quarter. So to put some color around the guidance change, that’s really good news, not bad news. That’s going to be a very profitable expenditure that will come back to us in the next fiscal year. Because of the way we structure UA, we structure for relatively quick paybacks compared to the industry because we’re conservative. So I do think – look, I think the team in Zynga is doing a phenomenal job delivering great properties. It starts there. It always starts there. And yes, I also believe the market’s becoming more reactive. Remember, the market was down for the first time in its history in 2022, and it was flattish after that.

And there were no new hits for years from us or anyone else. That’s clearly changing. I think it puts further evidence on the table that being exposed to mobile through the Zynga acquisition was a really, really good thing for this company, and we’re highly optimistic going forward.

David Karnovsky: Thank you.

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

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

Strauss Zelnick: Lainie?

Lainie Goldstein: So for the full year, when you look at the changes that we made to the fourth quarter forecast, the biggest drivers were towards the user acquisition spend and marketing for Match Factory!, then the lower mobile advertising that we were seeing, updating expectations for NBA 2K24 and the shift of an unnamed title out of the year. So those are the top four primary reasons for the change.

Doug Creutz: In that order?

Lainie Goldstein: Yes, that was the order of magnitude.

Doug Creutz: Okay.

Operator: Our next question is from Andrew Marok with Raymond James. Please proceed.

Andrew Marok: Hey, thanks for taking my questions. Good commentary on the Netflix tie-up with the GTA Trilogy. I guess going back to maybe how that came about, what made you guys want to partner with that kind of fledgling mobile gaming platform and be one of the first major third-party titles out there?