TTWO - NASDAQ

Good afternoon, and welcome to the Take-Two Interactive Software Second Quarter Fiscal Year 2023 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to our host, Nicole Shevins, Senior Vice President of Investor Relations and Corporate Communications. Thank you. You may begin.

Good afternoon. Thank you for joining our conference call to discuss our results for the second quarter of fiscal year 2023 ended September 30, 2022. Today's call will be led by Strauss

Thanks, Nicole. Good afternoon, and thank you for joining us today. I'm pleased to report that we delivered another consecutive quarter of solid results with net bookings of $1.5 billion. We experienced healthy player engagement, driven by exciting new game releases, post-launch content updates and bold beats for many of our mobile offerings, even as consumers continue to navigate the effects of various macroeconomic and geopolitical factors. We made excellent progress with our integration of

I'd like to begin by thanking our teams for delivering another strong quarter, which reflects our ability to captivate and engage audiences consistently by delivering the highest-quality entertainment experiences across all platforms. I’ll now discuss our recent releases. On October 14th , 2K and HB Studios launched PGA TOUR 2K23, the latest entry in our golf simulation franchise, to positive community sentiment and great critical acclaim, including GameSpot calling the title “The best simulation golf game ever made”. PGA TOUR 2K23 features golf icon and all-time sports great, Tiger Woods, and celebrates his legacy by introducing him as both a playable in-game pro and an Executive Director who advised the game’s development team. The game features several new additions and improvements, including an enhanced roster of male and female pros; the ability to play as NBA legends Michael Jordan and Steph Curry; a Topgolf mode; a deeper array of personalization options and gear; licensed courses and the ability to design original courses; and multiplayer offerings. HB Studios will continue to support the game with additional pros and courses, as well as seasonal updates and the Clubhouse Pass. On October 21st, 2K and Gearbox Software released New Tales from the Borderlands, a choice-based, narrative adventure game that is a successor to the beloved Telltale Games title. The franchise has always been an incredible canvas for storytelling and we are pleased to add this new offering to the portfolio. On November 2nd, Private Division and Roll7 released Finding the Flowzone, the second and final DLC expansion for the critically acclaimed skateboarding action-platformer, OlliOlli World. The release has received praise from critics including Eurogamer who commended Finding the Flowzone as a “fond goodbye to this magnificent game,” and stating that the expansion “is completely rad.” Now, I will discuss our announced offerings for the balance of Fiscal 2023 and beyond. On December 2nd, 2K and Firaxis Games will launch Marvel's Midnight Suns on Windows PC, Xbox Series X|S, and PlayStation 5. The Xbox One, PlayStation 4, and Nintendo Switch versions will follow at a later date. In support of the upcoming launch, 2K has produced five short videos that are being released weekly on Marvel Entertainment’s YouTube channel, which provides the backstory of how the game’s lead character, Lilith, became the Mother of Demons, and how Super Heroes like Blade, Magik, Ghost Rider and Nico Minoru came together to form the young core of the Midnight Suns. During the fourth quarter, 2K and Visual Concepts will launch WWE 2K23. Building upon the success of 2K22, which had nearly 450 million matches played and 10 million hours of game content viewed on Twitch, fans can look forward to the series once again redefining interactive entertainment within the squared circle. We are grateful to have such a supportive and collaborative partnership with WWE, and 2K will have more to share about WWE 2K23 in the coming months. On February 24th, Private Division and Intercept Games will launch Kerbal Space Program 2, the sequel to the beloved rocket building sim, in Early Access for PC on Steam, Epic Games Store, and other digital storefronts. KSP2 will bring an array of content at the launch of Early Access, making this the most visually impressive KSP game yet. The game will also feature improved tutorials and user onboarding to provide players with the necessary knowledge to excel at space flight. Built from the ground up, KSP2 will also introduce the ability to customize and paint vehicles, leading to deeper personalization and expression in every build. Those that purchase KSP2 in Early Access will help inform the future development of the game by providing feedback directly to Intercept Games leading up to the full launch of the title. We can’t wait for the incredibly passionate KSP community to take flight in this new entry to the series. Throughout the balance of the fiscal year, Rockstar Games will continue to support Grand Theft Auto Online with additional major content updates, alongside popular annual seasonal-themed offerings and more. o In mobile,

Thanks, Karl, and good afternoon, everyone. Today, I'll discuss the key highlights from our second quarter before reviewing our guidance for fiscal year 2023 and our third quarter. Please note that our second quarter results include our combination with

Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for delivering another solid quarter. And to our shareholders, I want to express our appreciation for your continued support. We'll now take your questions. Operator?

[Operator Instructions] Our first question comes from Eric Handler with MKM Partners.

Wonder if you could just give us a little bit of insight into the mobile business. Do you feel like we're sort of close to a stabilization for that business? And we've been hearing everything -- a lot of different things about what's going on in mobile now, specifically top games are doing well, it's the smaller games that are having some problems. Are you seeing issues with maintaining DAUs or is it spending? Any insight you can give would be greatly appreciated.

Look, engagement is very stable. We got a lot of terrific hit titles at

Great. That's helpful. I wonder, just as a follow-up, it looks like just going between your company presentations, it looks like your pipeline of games from fiscal '23 to fiscal '25 is unchanged. Is that a pretty fair assessment?

It is. We have 87 titles coming across mobile, PC and console. And it's the most robust pipeline we've ever had certainly and one would argue, one of the most robust pipelines in the industry.

Our next question comes from Andrew Uerkwitz with Jefferies.

I guess there's a lot of frustration. You had the S-4 out earlier in the year. We've gotten two cuts here. And the move in the pipeline around is part of the blame. What -- is there anything you guys can share that gives you confidence that there's going to be growth next year, especially in the core Take-Two? It looks like part of the cut is half 2K, if I'm doing my math right. So just curious, what is giving you that confidence or anything you can share that gives us the confidence to go along with it here?

It's driven by the pipeline, of course. So we know what the release schedule is and we feel really good about it. And if we didn't, we wouldn't call for a sequential growth and record results in the next three years. But I understand the frustration. And look, we call it as we see it and I think we're known for that. Had we expected where we were right now, then we wouldn't be guiding down. We're guiding down because things have materialized in a way that's different than our expectations. Some of that is related to pipeline, but frankly, not most of it. Most of it's related to mobile, a significant amount of FX as well. But there have been some modest pipeline shifts. So the good news is those titles are, of course, coming.

Got it. And then if I could just throw one follow-on there. You guys are known for quality and I'm sure a lot of the delays or shifts are related to polish. But is there something you guys are seeing that's -- it's just too much going on? Just kind of just walk us through kind of the thought process behind it. It just seems like -- was COVID a bigger impact? This will be, I think, two or three years now with record pipeline and so far, just we're all being patient here.

I understand the concern and I understand the question as well. No, we're not seeing any productivity issues, for example. We definitely have very high quality expectations in the bands, and that's reflected in the fact that we're performing across the board. So this company is a hit factory. We haven't had a disappointing release in as long as I can remember. And that's honestly the most important thing. So we would much rather -- if you have to choose, I'd much rather have the situation we're in, which is we've had some delays and we have had to revise down guidance. I'll choose that any day over taking some flops. That's really the key in this business. We've had issues -- I mean, we've been around here long enough to remember them. Where in the past, we had delays in titles and it was ultimately always worth waiting for because when we got to the other side, the results were delivered, and the small amount of the time delay didn't ultimately matter in the context of the results that we were able to deliver. I'm hopeful that will be the case here as well.

Our next question comes from Eric Sheridan with Goldman Sachs.

Maybe I could just go back to the mobile business for a minute. In terms of what you've learned about the mobile business over the last 12, 15 months, some of before the close and since the close in

It's Karl. So really, what it means to us, what we're working on building is

Our next question comes from Matthew Thornton with Truist Securities.

Maybe two, if I could. One for Strauss. Strauss, you talked about sequential years of growth and a record performance. I guess the question there is, what are you alluding to? Is that EBITDA, earnings per share, margins? Any meat you can kind of put on that would be helpful. And then just second one for Lainie. Lainie, I think you called out $50 million in -- I interpreted that as incremental currency headwind impacting the full year guide, but you also alluded to pipeline moving around. Could you quantify what that impact is and kind of what that is for the year?

Yes. What I was referring to is top and bottom line, so net bookings and income, however you describe EBITDA as a handy measure.

Yes. And for the full year, I mentioned that about 70% of the downward revision is the mobile business and the release slate together, and about $50 million is for the FX currency headwinds.

And is there any color on what slipped in the pipeline? And I'm sorry if I missed that.

Sure. For -- the changes in release schedule, there are several changes that happened during the quarter. So there was one mobile title from 2K that moved and Gen 8 and Switch versions of the Marvel's Midnight Suns moved into fiscal '24. And also KSP2 has now shifted to early access this year. So those are the major changes in the release schedule.

Our next question comes from Matthew Cost with Morgan Stanley.

Just on the PC console business, are you seeing a divergence between the performance of Grand Theft Auto and NBA 2K, specifically where NBA 2K RCS is outperforming Grand Theft Auto? And if so, can you give any more color on the player and consumption dynamics you're seeing in GTA? And then on the mobile side, you highlighted how the advertising business is hanging in there and growing a fair bit better than that purchases. Do you expect the advertising to materially outperform in-app purchases over the next couple of quarters? The reason I ask is because presumably, a lot of those ad dollars are coming from other game companies. And then I wonder if eventually that feels the pain from in-app purchases across the industry going down.

Yes. Thanks for your questions. Look, GTA Online and NBA 2K are very different animals. GTA Online has been around for nearly 10 years. It's beloved by a massive audience. GTA V, the underlying title has sold in more than 170 million units. NBA 2K is an annualized release, and so we get an annual snapshot of how virtual currency is doing. Engagement is very high indeed. Virtual currency is up in NBA 2K23. The mobile advertising business, look, these are two different businesses and the vast majority of our net bookings at

Our next question comes from Drew Crum with Stifel.

Maybe just piggying back and off the last question, asking more broadly. With your guidance update and the impact from more cautious macro backdrop, if you isolate your console PC business, can you discuss it in any way you change your view on RCS for this part of the business, so excluding multiple? And then separately, can you talk about the decision to close Playdots? And is this, in any way, factors into that $100 million-plus of cost synergies that accompanied the

So for RCS, we did lower our expectations. Most of it was for mobile since our prior guidance assumed that mobile would experience some improvement in the second half of the year. But we no longer expect that since the current data for the industry and our real-time performance has shown that we think it will lower in the second half of the year. But we are also assuming some softer performance for several of our large non-mobile titles that are meaningful contributors to RCS. So that's why our expectations for RCS are to come down in the second half of the year.

And with regard to Playdots, we've relocated the operations of our successful game, Two Dots to another studio. And yes, that was driven by the integration benefits that we felt we could achieve.

Our next question comes from Mario Lu with Barclays.

Wanted to ask about mobile. With the full year guidance, 70% of it coming from mobile but Rollic outperformed in the second quarter. So is there some main factors you can point to that separates Rollic from the rest of the mobile portfolio. Is it being kind of immune to IDFA? Is it competition? And then lastly, just curious to hear your thoughts on potentially leveraging the success of Rollic with perhaps cross promotion to other mobile games?

So Mario, 70% is mobile and the movement in the release schedule, so it's a combination of both of those two items. So it's not only mobile. But you're right, Rollic did outperform in Q2 so that business is doing really well.

And some of the reasons because the Rollic is doing well is obviously, it's an advertising-driven business, and we've had some success from an advertising perspective, both in terms of efficiency and inventory availability. And also, it's just given the nature of the hypercasual business, it's not necessarily reliant as much on targeted advertising. So it's a little bit easier to grow your UA in that context because -- where you have situations like IDFA doesn't necessarily Rollic business or the hypercasual business in the same way that it would in the normal bubble business. I'm sorry, I missed the second question. What was that, about cross-promotion?

Yes, the question was, your thoughts on potentially leveraging the success of Rollic to cross-promotion or view that as an acquisition channel to other mobile…?

Yes, there are certainly opportunities to do that. You can make an argument that it's a different kind of a customer. I think there's obviously overlap. There may be some differences. But the fact that you've got a large funnel of players coming into your database always going to be something that's going to help your UA strategy across your entire enterprise and specifically on the mobile side of the business.

Our next question comes from David Karnovsky with JPMorgan.

Just regarding the $500 million of revenue synergies with

Yes. On the first question, yes, there are a number of early opportunities that we've identified, including our approach directly to the consumer on the mobile business, which is pretty exciting and could generate material benefits. And we're working on a number of properties as well. It will take longer to bring some titles to market but that's super exciting.

And in terms of the operating expense synergies, we do have some of the synergies with

Our next question comes from Doug Creutz with Cowen.

Just to tie a couple of things that have already been said together. You mentioned that you've been assuming that mobile would improve in the back half of the year and now you're not assuming that. Is it simply to say that you thought it would get better isn't or that it's actually continued to deteriorate since the last call?

It's the former.

Our next question comes from Martin Yang with Oppenheimer.

My first question is on NBA 2K's ASP trends. You mentioned there's some year-over-year improvement. Can you maybe dig into details on what contributed to the ASP improvement?

Yes, it’s basically we came out with a Championship Edition this year. Every year, we do different marketing packages or different SKUs. We had a particularly successful one this year that features some very prominent basketball players, and that carries a much higher average selling price and that's affecting the ASP. So it really is just sort of -- it's the SKU mix of the title.

Got it. And then a follow-up question regarding your mobile synergy. Is there any milestones you could share with us updating where the teams are at? Are new teams being formed to build mobile game space on your core IP? Is there any games in aviation phase or any other milestones will be appreciated?

Yes. We don't have anything specific to announce right now. And I assume your question is really related, as it relates to releasing Take-Two IP or games, yes. Because obviously, there's a lot of other smaller things we can do with leads, et cetera, and also just the efficiencies about bringing the companies together, T2 mobile and

Our next question comes from Matti Littunen with Bernstein.

First question on NBA units. So it sounds like, if I heard correctly, that the unit number so far is very similar to what you said a year ago. So could you just confirm, has it been broadly similar? Has there been any slight growth or decline on that? And then on the live services revenue, could you give us any color in terms of how that revenue is currently split between MyCAREER and MyTEAM and maybe how that's trending over time?

Yes. It's roughly the same number of units year-over-year and virtual currency spending is up. And we don't split out the spending in the different modes for the purpose of this call.

Our next question comes from Brian Fitzgerald with Wells Fargo.

Lainie, you talked to this a little bit. But in terms of labor, how do you think about things improving as the market cools off a bit for tech employees? And how are you thinking about headcount growth and retention from here? Does the cooling labor market give you any leverage in terms of getting developers back to the office? Does that help things? Any color there would be great.

Well, we don't really look at our relations with our colleagues as one of leverage, so we probably wouldn't describe it through that lens. I do think that it's probably going to become easier to hire people when a lot of tech businesses are laying people off. We don't expect a rip and we don't have a hiring freeze. We're always judicious about the people we bring on board. We pride ourselves on being highly efficient, and we believe we are highly efficient now. So I do think that this may make it somewhat easier to hire really talented people, but we wouldn't use these times to apply leverage. We believe that we have great relationships with our workforce and those are terribly important to us.

Our next question comes from Omar Dessouky with Bank of America.

My question is about mobile advertising efficiency. How has mobile advertising efficiency in the September quarter trended versus the March and the June quarters, especially at

Just to be clear, you define advertising efficiency as in-app purchases divided by advertising spend?

Yes, or the reciprocal of that. So like the total advertising spend as a percentage of bookings. Sorry, I should have said it that way.

Right. So I think, look, we don't break -- we're not necessarily breaking that out specifically and I'm not sure that I would characterize that as efficiency, but it certainly would be an interesting measure to look at. And as we said before, we've experienced pretty strong growth in our advertising business and we've had some pressure on in-app purchases. So it stands to reason that, that ratio would probably be going more in favor of the advertising business versus in-app purchases. That isn't necessarily a long-term trend. That's just something that we're seeing in the short run. We fully expect in-app purchases to come back at one point in the future. As Strauss said before, a little hard to gauge that when that may happen, but that is our expectation. So those ratios, I don't believe are necessarily going to be fixed over time or necessarily moving in a specific direction, again, depending on what happens in the broader market.

Okay. And just a follow-up on that would be, have you changed which channels you're using for user acquisition for mobile, specifically for

Yes, I don't think the mix in terms of where we're spending concentrating has changed dramatically based on anything that we've seen in the market. You can certainly expect that day-to-day, quarter-to-quarter, month-to-month, you're going to see variations depending on where media opportunities exist. So I'm sure you're going to see some variation depending on what happens in specific media outlets. But I don't see a broader trend that's pushing us towards any particular asset versus another.

Our next question comes from Mike Hickey with Benchmark.

The first one is on your guidance for '23. I mean, obviously, a couple of revisions here. Do you feel like you're sort of being conservative enough? Obviously, a lot of uncertainty on the macro mobile, but is there still downside risk and where would that be? And then on '24, you said growth sequentially. You've given us some data on the S-4 and I think on your presentation with

So in terms of the guidance for '23 on being conservative or still downside risk, we always guide based on what we know at the time that we know it. So I wouldn't say they're conservative or a risk either way. I feel like we gave the best information that we have at the time that we have it. So it's what we know right now. And hopefully, the -- it gets better, but that's what we feel the numbers are at this time. And in terms of the CAGR and the fiscal -- the numbers that were in the S-4, we generally do not provide long-term growth targets in our normal course of business. We only did that previously because of the pending combination with

And with regard to the leak, it was terribly unfortunate and we take those sorts of incidents very seriously indeed. There's no evidence that any material assets were taken, which is a good thing. And certainly, the leak won't have any influence on development or anything of the sort. But it is terribly disappointing and causes us to be ever more vigilant on matters relating to cybersecurity.

Our next question comes from Clay Griffin with MoffettNathanson.

I guess two. It seems like the legacy Take-Two mobile games are holding in a bit better than the legacy

So in terms of the legacy Take-Two mobile business versus the

It's all one, it's all

Yes. And we're specifically hoping that with the T2 mobile titles, and we're starting to see some of this collaboration happening that we're going to be -- they're going to be able to benefit from the power of the

And on the subscription side, look, we've been very cooperative with both Sony and Microsoft on their subscription offerings when it makes sense for us. And my own views have not changed at all since I first started talking about subscription, which is now, I want to say, probably four years ago. The interactive entertainment business is very different than the linear entertainment business. People consume far fewer hours of interactive entertainment in a given month than they do of linear entertainment. And within that consumption, there are far fewer titles consumed in interactive entertainment than there are with linear entertainment. So I, at least, pose the question as to whether subscription makes as much sense for interactive entertainment as it does for linear entertainment and registered some skepticism, which I still hold. I think the second area of skepticism was whether it made sense -- and this is a rhetorical question because I think the answer is no, to offer frontline titles [day and day] with titles on a subscription service. I don't think that ever made sense. I still don't think it makes sense. And I believe that it's now becoming obvious that it doesn't make sense. It's just a lost opportunity for the publisher. So I wouldn't want to speak for my friend, Phil, but our views remain unchanged. There probably is a subscription business. It's a catalog business. It's probably best aimed at very avid consumers because those are the consumers who are interested in playing catalog titles, implying a whole bunch of different titles in a given month. But I don't think it's a mass market service that supplants the interactive entertainment business as we know it at all. And I don't think there's any evidence to the contrary so far.

We have a follow-up question from Matthew Thornton with Truist.

Maybe two quick follow-ups. First one on coming back to mobile, again. Maybe this is for Strauss. How do you think about what's currently going on from a macro perspective as opposed to just a user acquisition perspective, given what's going on in the iOS environment, in particular? Is there a way to tease apart what percentage of the pressure is from one versus the other? And relatedly, what's your level of confidence that we come out of? I mean, macro will resolve itself. But from a UA perspective, from an ecosystem perspective, what's your level of confidence that you can kind of control coming out of this doldrum? That's the first question. The second one is a really easy one. Given where the stock price is, I'm kind of curious your appetite around buybacks. I know you guys have been fairly opportunistic in the past. Obviously, we've taken on some leverage with

Yes. In terms of mobile, from a macro perspective, I think that you're right. There's a difference between user acquisition and retention and conversion. And on user acquisition, I think we and everyone else is just going to be a bit more selective to drive efficiency. And in terms of retention and conversion, that's a reflection of people just not having to spend mobile. You can enjoy a title without spending in-game. 90-plus percent of consumers do not spend in-game. And so at times when consumers are feeling the pressure of higher prices for fuel and food, for example, they may be less likely to spend money on entertainment, especially when you can have the experience anyhow. So in terms of our expectations, I think this is -- it's a moment where we will, in fact, tune up our UA spend to become more efficient. That's a good thing. And yes, we will probably see some pressure on in-game purchases for a period of time. As I said earlier in the call, not that I think you can underwrite to this because it's just 1 person's opinion, I think there'll be pressure for three to six months at least that's driven by the economy and geopolitical factors. And I'm hoping that by the end of '23 -- I believe that by the end of '23, things will normalize and will be on an upward swing again. And Lainie will take the question about buybacks.

Sure. So we continue to believe in returning value to the shareholders and via share buyback, but we'll only do so when the conditions are right. And obviously, we believe that there is deep value in our market price currently. But in order to do a share repurchase, we would need to do it in an open trading window and also have the optimal capital structure that supports the purchases. So we'll see when it makes sense for us to do it. So that's how we see it.

Our next question comes from Martin Yang with Oppenheimer.

This is a question referring to your earlier definition of Take-Two’s identity as a hit factory. I want to know if you hold a similar view over your mobile game portfolio. Do you feel there's a need for a portfolio review on mobile games based on the quality and future potentials?

Yes. At any given time, we're always reviewing our portfolio, both in terms of the performance of the current titles and the potential for new titles that we're working on. And Frank and his team are very focused on making sure to optimize the current title lineup and to make sure that our development for new titles is as effective and poised for success as it possibly can be. Good news is we have a terrific lineup of great titles and our mobile titles all make money.

Our next question comes from Omar Dessouky with Bank of America.

I'm just going to sneak a quick one in here. And apologies if Karl had already answered this by saying that you don't have the details. But in terms of part of your synergies may come from applying PC console IP to the casual mobile market using the

I think it's a great question, thank you. And I think the bottom line is you're probably not going to convert a console player to become a mobile player. You have to appeal to a mobile player. And we believe that legacy IP, when properly developed as a great title, can do just that. But it's not a SLAM DUNK by any means. It's still got to be a great game. But you're not going to convince someone who never plays a mobile title to play a mobile title just because it's based on console IP.

There are no further questions at this time. I'll hand the floor back to management.

Want to thank everyone for joining us today. I want to say thanks particularly to our dedicated team of colleagues all around the world who continue to do a great job. While it would be nice always to have the best possible news in an upward sloping curve, this is a business that occasionally does present us with challenges. This team is well suited to challenges. We have a great pipeline, we have a great team. We have the ability to deliver, and we wish you all a great holiday season. Thank you joining us. And thank you for your support.